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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from                      to                     .

Commission File Number: 001-38046

ICC Holdings, Inc.

(Exact name of registrant as specified in its charter)

 


Pennsylvania

(State or other jurisdiction of
‎incorporation or organization) 

81-3359409

(I.R.S. Employer
‎Identification No.) 

225 20th Street, Rock Island, Illinois

(Address of principal executive offices) 

61201

(Zip Code) 

(309) 793-1700

(Registrant’s telephone number, including area code)

 


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ICCH

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes    No 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes    No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   

Accelerated filer   

 

Non-accelerated filer     

Smaller reporting company   

  

Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act . 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2022, based upon the closing sale price of the Common Stock on June 30, 2022 as reported on the NASDAQ Stock Market, LLC, was $34,423,443. Shares of Common Stock held directly or indirectly by each reporting officer and director along with shares held by the Company ESOP have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s common stock outstanding as of March 9, 2023 was 3,151,133.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for our 2023 Annual Meeting of Shareholders which is to be filed within 120 days after the end of the fiscal year ended December 31, 2022, are incorporated by reference into Part III of this Form 10-K, to the extent described in Part III.

 

 

 

Table of Contents

 

   

Page 

PART I

   

Item 1.

Business

3

Item 1A.

Risk Factors

23

Item 1B.

Unresolved Staff Comments

35

Item 2.

Properties

35

Item 3.

Legal Proceedings

35

Item 3A.

Forward-Looking Information

36

Item 4.

Mine Safety Disclosures

37

     

PART II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

38

Item 6.

Selected Financial Data

40

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

58

Item 8.

Financial Statements and Supplementary Data

60

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

96

Item 9A.

Controls and Procedures

96

Item 9B.

Other Information

96

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 96
     

PART III

   

Items 10-14.

 

97

     

PART IV

   

Item 15.

Exhibits, Financial Statement Schedules

98

     

Exhibit Index 

99

Signatures 

100

 

 

 

 

Item 1. Business

 

Overview

 

ICC Holdings, Inc. is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-K, references to the “Company,” “we,” “us,” and “our” refer to the consolidated group. On a stand-alone basis ICC Holdings, Inc. is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc.; ICC Realty, LLC, a real estate services and holding company; Beverage Insurance Agency, Inc., dba Beverage Insurance Specialty, a non-insurance subsidiary; Estrella Innovative Solutions, Inc., an outsourcing company; Southern Hospitality Education, LLC, dba Katkin, a full-service food safety and education company, and Illinois Casualty Company (ICC), an operating insurance company. ICC is an Illinois domiciled company.

 

We are a specialty insurance carrier primarily underwriting commercial multi-peril, liquor liability, workers’ compensation, and umbrella liability coverages for the food and beverage industry through our subsidiary insurance company, ICC. ICC writes business in Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Pennsylvania, Utah, and Wisconsin and markets through independent agents. Approximately 22.6% and 24.0% of the premium was written in Illinois for the years ended December 31, 2022 and December 31, 2021, respectively. The Company operates as a single segment.

 

We primarily market our products through a network of 191 independent agents in the states that we write in. ICC's financial strength rating of "A-" (Excellent) has been reaffirmed as of July 19, 2022, which is the fourth highest out of fifteen possible ratings. The Long-Term ICR is stable. A.M. Best also reaffirmed the Long-Term ICR of ICC Holdings, Inc. at “bbb-“ (Good). The outlook assigned to the credit ratings of the Company stable, as of July 19, 2022. We expect that ICC’s upcoming evaluation by A.M. Best should occur on or about May 4, 2023, and therefore the ratings from this evaluation will not be available at the time of this report.

 

Since inception, ICC has specialized in providing customized insurance products and aggressive claims defense for customers exclusively in the food and beverage industry.

 

ICC was founded as an inter-insurance exchange in 1950 based upon the recognition that establishments serving alcohol require unique insurance protection. Beginning in 1998, we expanded the scope of our product offerings beyond liquor liability to include property, general liability, and umbrella. Workers’ compensation coverage was added in 2007. Our goal is to meet the full range of business insurance needs of our clients in the food and beverage industry.

 

In 1999, ICC recognized the significant need to automate. Upon determining available commercial software was inadequate to meet our long-term vision, we contracted the development of an integrated platform to handle agency, policy, and vendor management. Introduced in 2001, the first module successfully improved productivity and reporting capabilities. We built on that success by adding document imaging, claims, billing, and risk management modules. As it has grown, our information management system has provided us with a unique and comprehensive ability to automate processes, track and examine risk traits, and monitor claims development. As a result, ICC has constructed and leveraged a multi-variant pricing algorithm that allows us to better analyze our business to more effectively price to actual exposure.

 

ICC mutualized in 2004 and began to expand its territory geographically within the Midwest. We are an admitted carrier in 15 states: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Michigan, Missouri, Ohio, Oregon, Pennsylvania, Tennessee, Utah, and Wisconsin. As we expand our territory and product lines, we maintain our focus and commitment to the food and beverage industry. As a result, we have developed an expertise in our niche, particularly within the areas of underwriting, loss control, and claims management. ICC continues to leverage that experience into the ongoing development of innovative insurance products and services uniquely tailored to the food and beverage industry.

 

ICC is subject to examination and comprehensive regulation by the Illinois Department of Insurance. See Item 1. Business Regulation.

 

Our executive offices are located at 225 20th Street, Rock Island, Illinois 61201, and our phone number is (309) 793-1700. Our corporate website address is http://IR.ICCHoldingsInc.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and such information should not be considered to be part of this Annual Report on Form 10-K.

 

 

Our Business Strategies

 

We believe that our mission is to deliver expertly crafted insurance products and services for the food and beverage industry. Accordingly, we believe that this focus positions us to write profitable business in both hard insurance markets (where industry capital is constricted, competition is low, and premium rates are rising) and soft insurance markets (where industry capital is rising, competition is high and premium rates are falling). As part of our business process, we have developed our business strategy and focus using the following guiding principles to reflect the essence of who we aspire to be:

 

 

we exist to return value to our stakeholders in the form of strong financial performance and sustained surplus growth;

 

we conduct our business with the highest ethics and unquestionable integrity;

 

we recognize and reward the commitment of all associates who make ICC a success, by challenging them, valuing them, and recognizing their contribution, while cultivating a mutually supporting culture;

 

we are committed to the independent agency system and our mutual drive to deliver the highest quality products at competitive prices;

 

customer service—understanding and meeting the needs and expectations of our policyholder and agents—is at the fundamental core of our existence;

 

we thrive in the marketplace by pursuing a unique understanding of the niche, offering customized products, and aggressively defending our insureds;

 

we identify worthy causes to support with our company and associate resources. We promote good corporate citizenship; and

 

innovation drives our efficiency, quality, and effectiveness. We proactively improve our products and processes by intelligent investment in talent and technology that meets the exacting needs of our customer.

 

In order to effectuate our mission and guiding principles, we have identified the following core strategies to achieve our long-term success:

 

 

design and market commercial property and casualty products customized for the food and beverage industry;

 

pursue deliberate geographic expansion;

 

foster partnerships with independent agents who focus on the food and beverage industry and appreciate the Company’s commitment and expertise;

 

leverage data and technology to maximize operational efficiency, maintain sustainable pricing and drive continuous innovation;

 

implement an investment strategy that maximizes return within acceptable risk tolerances;

 

promote a culture of excellence that encourages teamwork and contributes to talent attraction, development, and retention; and

 

maintain a robust and comprehensive Enterprise Risk Management program, focused on upside optimization and downside mitigation.

 

Competitive Growth Strategies

 

Technology – We believe that existing and developing technology and information systems are impacting and will continue to impact the insurance industry’s use of risk analysis in the underwriting process, providing tools for reduction of claims, and modernizing the claims handling process. As part of our focus, we have internally developed a completely integrated policy management system. This system allows us to leverage loss control data for predictive analytics in both the claims and underwriting areas. For example, in the underwriting area, we create pricing models taking into account the unique characteristics of our customers, with industry-specific variables such as latest hour of close, type and frequency of on-site entertainment, and average alcoholic beverage pricing. We also have achieved better efficiency by moving to a more paperless organization and have integrated off-site employees in our claims, underwriting, accounting, loss control and IT development areas. We intend to remain a leader in the industry in utilizing technology and data analysis to price our coverage based on the risk assumed, reduce accidents and provide prompt claims response.

 

 

Industry Expertise – We have provided the food and beverage industry with insurance products and services since 1950. By leveraging over 70 years of experience in this industry, we better understand our customers and their needs. This understanding allows us to more accurately price our products and services and defend claims aggressively and economically using the experience of our in-house legal department and an established network of specialized defense attorneys. We are recognized as the exclusively endorsed property and liability insurance provider for the: Arizona Licensed Beverage Association; Colorado Licensed Beverage Association; Tavern League of Colorado; Illinois Licensed Beverage Association; Michigan Licensed Beverage Association; Minnesota Licensed Beverage Association; Ohio Bar Owners Association; and, Pennsylvania Licensed Beverage and Tavern Association. We provide insurance agents with continuing education on industry topics, such as liquor liability, kitchen fire prevention, and alcohol server training. Through our subsidiary, Katkin, we provide a variety of training programs for our policyholders on food handling and alcohol serving as a value-added service and risk elimination/mitigation tool. Our employees are also regular panel speakers at local and national claims conferences and other industry association events. 

 

Enterprise Risk Management – As part of our effort to grow responsibly, we have put in place a cross-functional, multi-dimensional enterprise risk management program. The program is focused on financial, organization, operational, tactical, market and legal risks and is managed at two different levels: the enterprise risk committee of our board of directors and our internal enterprise risk management committee. The focus of the enterprise risk committee of our board of directors is on oversight, top tier risk, emerging risks, and risk optimization. The internal enterprise risk committee is comprised of our executive team, along with our actuarial manager, which is focused on conducting a review of all risks attendant to the Company at least annually; rating triaged risks for severity, frequency, and control; completing risk control reports for stress testing, risk tolerance, and mitigation plans; measuring and monitoring risk on an ongoing basis; and tying enterprise risk management to individual performance evaluations and compensation. Annually the Company, working with its reinsurance broker, completes an economic capital model for the insurance operations of ICC.

 

Growth Strategies

 

While we have established a significant market share in our existing territories, we believe that there is still opportunity for growth within our existing footprint. We will continue to seek out insurance agency partners who have a commitment to our niche and an ability to sell the value represented by our products. Our long-term growth plan also involves expanding geographically into states where we believe current insurance laws provide an attractive market within our niche for our existing products and services. We will consider geographic expansion opportunities that allow us to leverage existing agency relationships whose footprints overlap our own. Growth opportunities will always be carefully evaluated with long term profitability at the forefront of the decision-making process.

 

Although we do not have any current plans or intent to expand or grow our business by acquisition, we will consider opportunities that are presented to us.

 

Reaction to Market Cycles

 

Many insurance companies sporadically target businesses within our niche; however, a relatively small number make a long-term commitment to the niche through changing insurance market cycles. When the insurance market is “hard” and premium growth is achievable in less specialized segments, many carriers exit this niche. Large and diversified insurance carriers have the ability to shift their focus and resources to less challenging areas. When market conditions “soften,” those same carriers often aggressively move back into our niche for premium growth. Because we specialize in the niche, we do not shift resources to other market segments. Therefore, the Company generally maintains pricing stability throughout market cycles by relying on our strong loss control, underwriting and claims expertise, and our customer service commitment. We react to market cycles by adjusting our appetite for risks based on pricing and cycle conditions, but we maintain a consistent commitment to the food and beverage industry. Due to the relatively small number of insurance companies that make a long-term commitment to this niche, the insurance market does not fluctuate to the same extent as the insurance market for the general commercial market.

 

 

Our Challenges

 

Our business faces significant challenges that can impede our goal of growing our business while realizing operating profits, including the following:

 

Changes in the Economy

 

Factors such as business revenue, consumer spending, the volatility and strength of the capital markets, and inflation can all affect the business and economic environment. These same factors affect our ability to generate revenue and profits. Insurance premiums in our market are heavily dependent upon our customer revenues, payroll, property values, and ability to operate their businesses as normal. In an economic downturn characterized by higher unemployment, declines in spending and disposable income, the demand for insurance products is adversely affected. Changes in the economy may lead our customers to have less need for insurance coverage, to modify coverage or to not renew with the Company, all of which affect our ability to generate revenue.

 

Estimating Our Loss Reserves.

 

We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and settlement expenses for reported and unreported claims incurred as of the end of each accounting period. These reserves represent management’s estimates of what the ultimate settlement and administration of claims will cost. Pursuant to applicable insurance regulations, these reserves are reviewed by an independent actuary on at least an annual basis. Setting reserves is inherently uncertain and there can be no assurance that current or future reserves will prove adequate. If our loss reserves are inadequate, it will have an unfavorable impact on our results. See Item 1. Business Losses and Settlement Expense for a summary of the favorable and unfavorable developments in our loss reserves in the previous 10-year period.

 

Reliance on Independent Agents.

 

Our product is distributed through a contracted network of independent insurance agents. Independent agents are typically contracted with a number of insurance carriers. The producers within an agency will determine which product is most appropriate to recommend to their client or prospective client. The agency will select a product based on a variety of factors such as: premium; coverage; service including billing and claims; agency compensation and agency/company relationship. Establishing and maintaining long term financially successful agency relationships is very important to the long term success of a company.

 

Maintaining Our Financial Strength Ratings.

 

In June 2021, A.M. Best upgraded ICC’s financial strength rating to “A-” from “B++” stable outlook. This rating was reaffirmed as of July 19, 2022. A key to achieving our goal of significant growth in our premiums written is maintaining an A.M. Best rating of “A-” or better. Increasing our capitalization and maintaining strong operating performance are significant rating components reviewed by A.M. Best. This is combined with a review of various other rating requirements. If we are not able to increase our rating or if A.M. Best downgrades our rating, it is likely that we will not be able to compete as effectively and our ability to sell insurance policies could decline. As a result, our financial results would be adversely affected. A.M. Best reviews our rating approximately once per year.

 

Attracting, Developing and Retaining Experienced Personnel.

 

To sustain our growth as a property and casualty insurance company operating in a specialty niche market, we must continue to attract, develop and retain management, marketing, distribution, underwriting, customer service, and claims personnel with expertise in the products we offer. The loss of key personnel, or our inability to recruit, develop and retain additional qualified personnel, could materially and adversely affect our business, growth and profitability.

 

Competitive Strengths

 

Our opportunity for growth is driven by our competitive strengths, which include the following:

 

Use of Data and Metrics to Improve our Underwriting Results.

 

Our analysis of data available through both governmental and other industry resources, combined with our internal data, drive our underwriting and pricing decisions. We have developed a multi-variant risk grading system and pricing algorithm that combines both objective and subjective inputs that drive both whether to provide coverage and pricing. This information helps us avoid providing coverage to higher risk insureds while improving our overall risk profile. Most risks we insure are inspected within the first 60 days of policy binding, which permits us to cancel the policy if we determine that the insured is not an acceptable risk or pricing is inadequate. Each inspection consists of an extensive risk profile questionnaire as well as 25 to 100 pictures of the insured’s place of business. We believe this approach reduces claims frequency.

 

 

Focus on niche food and beverage business.

 

We target niche markets within the food and beverage industry that support adequate pricing and believe we can adapt to changing market needs ahead of our competitors through our strategic focus. We develop and deliver specialty insurance products priced to meet our customers’ needs and strive to generate consistent underwriting profit. We believe that our extensive experience and expertise specific to underwriting and claims management in the food and beverage industry will allow continued loss ratio improvement going forward. The Company is committed to retaining this underwriting and claim handling expertise as a core competency as the volume of business increases.

 

Strong market presence with name recognition and long-standing producer relationships.

 

We have been writing insurance for the food and beverage industry in Illinois since 1950. Approximately 22.6% of current direct premium was generated in Illinois for the year ended December 31, 2022.

 

Great care is taken in building the ICC brand in all states of operation and the Company holds significant market share in nearly all states serviced. ICC acknowledges that each state, each agency and each customer is unique. A commitment to quality of product and services is universally important and recognized.

 

Scalable operations positioned for growth.

 

We are focused on automation and operating efficiencies across our core functional areas. We have consistently increased premium per full time equivalent employee for five consecutive years with the exception of 2020 during which we experienced a decrease in written premium per full time equivalent employee due to the disproportionate negative impact COVID-19 had on the Company’s market niche. We believe we are well-positioned in both terms of personnel and systems to increase written premiums and to expand into new geographic markets with better than industry level profitability using the efficient operating infrastructure we have developed.

 

Experienced management team.

 

We are managed by an experienced group of executives led by Arron K. Sutherland, our President and Chief Executive Officer. Mr. Sutherland has served in his current position since June 2010, joined ICC in 2006 and has worked in the insurance industry for over 25 years. Michael R. Smith, our Vice President – Chief Financial Officer, has served with ICC since 2011. Mr. Smith has more than 25 years of experience in the insurance industry. Howard J. Beck, our Vice President – Chief Underwriting Officer, has been with ICC since 2004 and has over 33 years of insurance experience and 26 years of property and casualty underwriting experience. Norman D. Schmeichel, our Vice President – Chief Information Officer, has served with ICC since 2002. Mr. Schmeichel has more than 25 years of experience in information technologies and 18 years of experience in the insurance industry. Additionally, Julia B. Suiter, our Vice President – Chief Legal Officer, has served with ICC since 2009 and has over 25 years of experience in insurance defense and contract law. Kathleen S. Springer, our Vice President – Chief Human Resources Officer, has served with ICC since 2008 and has over 25 years of experience in benefits, compensation, and talent acquisition and more than 12 years of experience in the insurance industry. As a group, our executive officers have on average more than 23 years’ experience in the property and casualty insurance industry.

 

Products

 

ICC has specialized in the food and beverage industry since 1950. Our product language is based on Insurance Services Offices (ISO) forms, which is an industry standard, but tailored to the specific needs of our clients. We began by writing liquor liability or dram shop insurance and that remains a prominent line of business today. Commercial property and liability are written in a single policy as a business owners policy (BOP). ICC also writes workers’ compensation and commercial umbrella policies which are written as complementary lines to the BOP and liquor liability and are not offered on a stand-alone basis. As of December 31, 2022, ICC had 5,876 BOP policies, 6,763 liquor liability policies, 1,840 workers’ compensation policies and 1,591 commercial umbrella policies. 90.7% of BOP policies and 96.4% of liquor liability policies are for either restaurants or taverns. While we do not currently write commercial auto insurance, we do insure risks associated with the delivery of food or beverage.

 

Marketing and Distribution

 

Our commercial insurance product is sold by over 191 independent insurance agents, also referred to as producers. These agencies access multiple insurance companies and are typically established businesses in the communities in which they operate. We view these agents as our primary customers because they are in a position to recommend either our insurance products or those of a competitor to their customers. We consider our relationships with these agencies to be a core strength of the Company.

 

 

We manage our producers through quarterly business reviews utilizing various internally generated reports. Our quantitative agency review (QAR) measures each agency on a variety of weighted metrics and ranks them from high to low. The measurement is updated on a weekly basis and is available for all company employees’ review.

 

For the year ended December 31, 2022, two of our producers were responsible for more than 5% of our direct premiums written and our top 10 producers accounted for approximately 40.8% of direct premiums written.

 

Our agency partners are supported by our Marketing Department. These representatives also identify and train new agents. We conduct regularly scheduled webinars for agents as well as onsite training on company products and services. These include technical training about our products as well as sales training to effectively market our products. We also offer our agents industry specific training that qualifies for continuing education credit for state insurance license requirements.

 

Agents are compensated through a fixed base commission with an opportunity for profit sharing depending on the producer’s premiums written and profitability. Agents receive commission as a percentage of premiums (generally 15% for most lines, except worker’s compensation policies which are generally at 7.5%) as their primary compensation from us. We offer a contingent compensation plan as an incentive for producers to place high-quality business with us and to support our loss control efforts. We believe that the contingent compensation paid to our producers is comparable with those offered by other insurance companies and is designed to reward agents for growth and profitability.

 

Our marketing efforts are also supported by our claims, litigation, billing, underwriting and loss control departments. As industry specialists, we can offer expertise in all interactions with agents and/or policyholders. For example, our claims philosophy is to provide prompt and efficient service and claims processing, resulting in a positive experience for both the agents and policyholders. We take an aggressive, defense-oriented position on third party liability claims which is recognized and appreciated by our policyholders. We believe that these positive experiences result in higher policyholder retention and create new business opportunities for our agents. While we rely on our agents for front line distribution and customer support, underwriting, billing, loss control and claim handling responsibilities are retained by us. Many of our agents have had direct relationships with us for a number of years.

 

Underwriting, Risk Assessment and Pricing

 

Our underwriting philosophy is aimed at consistently generating profits through sound risk selection, stringent loss control and pricing discipline. One key element in sound risk selection is our use of risk characteristic metrics. Through our practice of focused underwriting, we have identified predictive metrics of data that many other insurance companies do not recognize or measure. Use of these metrics allows us to more effectively price risks, thereby improving our profitability and allowing us to compete favorably with other insurance carriers. We also are very active in leveraging our onsite loss control inspections. An example would be the monitoring of kitchen fire suppression systems servicing to reduce kitchen fire losses.

 

Our philosophy is to understand our industry and be disciplined in our underwriting efforts. We will not compromise profitability for top line growth.

 

Our competitive strategy in underwriting is:

 

 

Maximize the use of available information acquired through a wide variety of industry resources.

 

Allow our internal metrics and rating to establish risk pricing and use sound underwriting judgment for risk selection and pricing modification.

 

Utilize our risk grading system, which combines both objective and subjective inputs, to quantify desirability of risks and improve our overall risk profile.

 

Physically inspect most new insureds within the first 60 days of policy binding with our in-house loss control representatives. Our inspection consists of an extensive risk profile questionnaire and includes 25 to 100 electronic photos of the insured’s place of business. Inspections that demonstrate that a risk is not desirable is a basis for revoking coverage.

 

Provide very high-quality service to our agents and insureds by responding quickly and effectively to information requests and policy submissions. Treat our agents as partners and have the same expectation of them.

 

Our underwriting department works in teams with each agent assigned to one of three teams. We underwrite our accounts by evaluating each risk with consistently applied standards. Each policy undergoes a thorough evaluation process prior to every renewal.

 

 

Our underwriting staff of 27 employees has an average of 10 years of insurance industry experience. Howard J. Beck, our Vice President – Chief Underwriting Officer, has been with ICC since 2004 and has over 33 years of insurance experience with 27 years of property and casualty underwriting experience.

 

We strive to be disciplined in our pricing by pursuing targeted rate changes to continually improve our underwriting profitability while still being able to attract and retain profitable customers. Our pricing reviews involve evaluating our claims experience, loss trends, data acquired from inspections, applications and other data sources to identify characteristics that drive the frequency and severity of our claims. These results drive changes to rates and rating metrics as well as understanding what portions of our business are most profitable.

 

This knowledge and analysis enables us to price risks accurately, improve account retention, and drive profitable new business.

 

Claims and Litigation Management

 

Our claims team supports our underwriting strategy by working to provide a timely, good faith claims handling response to our policyholders. Claims excellence is achieved by timely investigation and handling of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves, and control of claims loss settlement expenses.

 

Claims on insurance policies are received directly from the insured or through our independent agents. Our claims department supports our producer relationship strategy by working to provide a consistently responsive level of claim service to our policyholders.

 

Vice President – Chief Legal Officer, Julia Suiter, provides oversight of our claims and legal departments. She has over 25 years of experience in insurance defense litigation and contract law. Ms. Suiter, supervises a legal department staff that includes a Litigation Manager, a Litigation Counsel, a Paralegal, a Claims Manager and a claims staff of 17 employees with considerable years of experience in processing property and casualty insurance claims.

 

Technology

 

Our technology efforts are focused on supporting our strategy of differentiating ourselves from our competitors through use of data mining, business intelligence solutions, and data analysis to determine profitability of new and existing business and to better price risks that we underwrite.

 

We have streamlined internal processes to achieve operational efficiencies through the implementation of a policy and claim imaging and workflow system. This system provides online access to electronic copies of policies, quotes, inspections, and any other correspondence enabling our associates to quickly and efficiently underwrite policies, adjust claims, and respond to our producers’ inquiries.

 

Since the system integrates all aspects of the policy life cycle, from underwriting to billing to claims, we can better automate all internal workflows through electronic routing thus lowering costs and providing better service to our customers. This system allows us to leverage loss control data for predictive analytics in both the claims and underwriting areas. For example, in the underwriting area, we can create pricing models taking into account the unique characteristics of our customers, such as neighborhoods, entertainment on site and average alcoholic beverage pricing.

 

We have implemented best in class virus or malware protections while still enabling our employees to work from any location. We are tested on a periodic basis to ensure our protections are sufficient.

 

We have the ability to scale since we are almost entirely a paperless organization. This allows us to integrate off-site employees just as if they are in the office. We intend to remain a leader in the industry by utilizing technology and data analysis to price our coverage based on the risk assumed and to both reduce accidents and provide a prompt response to claims.

 

As part of our disaster recovery program, we utilize a third-party backup software package to provide a complete copy of our production systems at an off-site location that is updated on a daily basis. We also have a generator that will allow the home office to operate in the event power or access to our headquarters is disrupted. We test this disaster recovery plan annually as well as continually expand its capabilities to eliminate business interruption to the best of our ability.

 

 

Reinsurance

 

In accordance with insurance industry practice, we reinsure a portion of our exposure and pay to the reinsurers a portion of the premiums received on all policies reinsured. Insurance policies written by us are reinsured with other insurance companies principally to:

 

 

reduce net liability on individual risks;

 

mitigate the effect of individual loss occurrences (including catastrophic losses);

 

stabilize underwriting results;

 

decrease leverage; and

 

increase our underwriting capacity.

 

Reinsurance can be facultative or treaty. Under facultative reinsurance, each policy or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of a class of business is automatically reinsured. Reinsurance also can be classified as quota share reinsurance, pro rata reinsurance or excess of loss reinsurance. Under quota share reinsurance and pro rata reinsurance, the insurance company issuing the policy cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission. The company issuing the policy in turn recovers from the reinsurer the reinsurer’s share of all loss and settlement expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the company issuing the policy to the extent of the coverage ceded.

 

We determine the amount and scope of reinsurance coverage to purchase each year based on a number of factors. These factors include the evaluation of the risks accepted, consultations with reinsurance intermediates and a review of market conditions, including the availability and pricing of reinsurance. A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. We expect 2023’s reinsurance spend to be similar to 2022. For the year ended December 31, 2022, we ceded to reinsurers $9.5 million of written premiums, compared to $11.0 million of written premiums for the year ended December 31, 2021.

 

The chart below illustrates the 2023 reinsurance coverage under our excess of loss treaty for individual liability and property risks (with the defined terms following the chart):

 

https://cdn.kscope.io/99a9d1f6b94de0ed44ed7ecbf14f17a6-g01.jpg
 

 

Term

 

Meaning

1 @ x%

 

“1” refers to the number of times that we reinstate the coverage. The number prior to the “%” sign indicates the overall cost to us when reinstating coverage.

AAD

 

This is short for Aggregate Annual Deductible. Aggregate annual deductible is the maximum amount ICC needs to pay within a policy period before the reinsurer pays for covered losses.

Basket Coverage

 

Excess liability reinsurance that attaches once retained losses in combined property and casualty occurrences (i.e., those that involve BOP property and BOP liability, or Liquor Liability or Workers’ Compensation or Hired and Non-owned Auto) exceed $1 million. If ICC has an occurrence where the combined property and casualty retention is greater than $1 million, then the company would recover up to $1 million of loss in excess of that $1 million retention. The basket coverage limits the Company’s retention in any one combined occurrence to $1 million and not the combined separate retentions provided for in the casualty reinsurance ($1.0 million), Workers’ Compensation reinsurance ($1.0 million), Hired and Non-owned Auto reinsurance ($750,000) and Property reinsurance ($1.0 million).

Casualty

 

For this chart, this refers to our Liquor Liability, BOP liability, Workers’ Compensation and any Umbrella policies.

Catastrophe

 

Reflects the sum of all individual losses directly resulting from any one occurrence, disaster, accident or loss or a series of occurrences, disasters, accidents or losses arising out of one event.

Free

 

Refers to the number of reinstatements available for reinsurance coverage. With this wording, each separate loss occurrence above the retention is covered by the treaty.

MAOL

 

This reinsurance sublimit puts a cap on the maximum loss any one life/claimant can contribute to the reinsurance recoverable.

Per Risk

 

Reinsurance in which the reinsurance limit and our loss retention apply “per risk,” rather than per accident, per event, or in the aggregate.

Retention

 

The amount of loss and settlement expense retained by us either per occurrence on casualty losses or per risk on property claims.

WC

 

This is short for Workers’ Compensation.

XOL

 

This is short for Excess of Loss reinsurance coverage.

XS

 

This is short for Excess. For example, our Property per Risk tower has three separate contracts providing coverage. The top layer in that tower provides $7.0 million coverage for each risk for losses in excess of $5.0 million.

 

We retain the first $1.0 million of workers’ compensation losses. Losses in excess of the $1.0 million are covered under our casualty excess of loss program within the Casualty XOL Tower up to $11.0 million. Above $11.0 million, losses are covered under a workers’ compensation cover within the WC XOL Tower that provides $14.5 million in excess of $11.0 million. We have an additional cover that provides $15.0 million of coverage in excess of $25.5 million for twenty-three direct policies issued by the Company.

 

Casualty risks (Casualty XOL Tower) (business owners liability other than hired and non-owned auto, liquor liability, umbrella) are covered for $10.0 million in loss above a $1.0 million retention for each loss occurrence. Hired and non-owned losses have a $750,000 retention instead of the standard $1.0 million retention on casualty.

 

Property per risk excess of loss program (Property Per Risk XOL Tower) provides coverage above our $1.0 million retention up to $12.0 million on a treaty basis and facultative for a few risks above that to their full limits.

 

Property catastrophe reinsurance (Section A Property Cat Occurrence) provides coverage in any one event for $14.0 million of loss in excess of our $1.0 million retention.

 

 

The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. Our reinsurance providers, the majority of whom are longstanding partners who understand our business, are all carefully selected with the help of our reinsurance broker. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our reinsurance partners have at least an “A-” rating from A.M. Best. According to A.M. Best, companies with a rating of “A-” or better “have an excellent ability to meet their ongoing obligations to policyholders.”

 

The following table sets forth the largest amounts of loss and loss expenses unpaid and recoverable from reinsurers as of December 31, 2022:

 

   

Losses and Settlement

             
    Expense Recoverable              
   

On Unpaid Claims (In thousands)

   

Percentage of Total

   

A.M. Best

Reinsurance Company

 

(In thousands)

   

Recoverable

   

Rating

General Reinsurance Corporation

  $ 6,913       50.7 %  

A++

Aspen Insurance UK Ltd

    1,250       9.2 %  

A

Partner Reinsurance Company

    1,081       7.9 %  

A+

Renaissance Reinsurance US Incorporated

    1,028       7.6 %  

A+

Everest Reinsurance Company

    898       6.6 %  

A+

Swiss Reinsurance

    731       5.4 %  

A+

Axis Reinsurance Company

    443       3.3 %  

A

Endurance Assurance Corporation

    407       3.0 %  

A+

Hannover Rueck SE

    382       2.8 %  

A+

Nationwide Mutual Insurance Company

    189       1.4 %  

A+

Toa Reinsurance Company

    145       1.1 %  

A

All other reinsurers including anticipated subrogation

    143       1.0 %  

A- or better

Total

  $ 13,610       100.0 %    

 

Losses and Settlement Expense Reserves

 

We are required by applicable insurance laws and regulations to maintain reserves for payment of loss and settlement expenses. These reserves are established for both reported claims and for claims incurred but not reported (IBNR), arising from the policies we have issued. The laws and regulations require that provision be made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The reserves are set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability.

 

Estimating the ultimate liability for losses and settlement expense is an inherently uncertain process. Therefore, the reserve for losses and settlement expense does not represent an exact calculation of that liability. Our reserve policy recognizes this uncertainty by maintaining reserves at a level providing for the possibility of adverse development relative to the estimation process. We do not discount our reserves to recognize the time value of money.

 

When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our claims staff. In estimating the appropriate reserve, our claims staff considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are adjusted by our claims staff as more information becomes available. It is our policy to resolve each claim as expeditiously as possible.

 

We maintain IBNR reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and paid loss and settlement expense for reported claims.

 

Each quarter, we compute our estimated ultimate liability using principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot provide assurance that ultimate losses will not exceed the established loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made.

 

 

The following table provides information about open claims, reserves, and paid loss and settlement expense on a direct basis only:

 

   

As of and for the period ended December 31, 2022

 

(In millions, except open claims count)

 

Open Claims

   

Total Reserves1

   

Case Reserves

   

IBNR Reserves

   

Paid Losses and Settlement Expense

 

Commercial Multi-Peril (non-liability portion)

  336     $ 4.97     $ 5.68     $ (0.71 )   $ 17.55  

Commercial Multi-Peril (liability portion)

  449       30.93       12.43       18.51       10.72  

Workers' Compensation

  217       7.15       3.44       3.71       3.25  

Other Liability - occurrence

  186       24.25       10.20       14.04       6.32  

Total

  1,188     $ 67.30     $ 31.75     $ 35.55     $ 37.84  

 

1

Assumed reserves of $0.31 million are excluded from the Total Gross Reserves. Workers Compensation ($0.28 million assumed reserve) and Umbrella Liability ($0.03 million assumed reserve) are the only lines of business that have assumed reserves.

 

The following table provides a reconciliation of beginning and ending unpaid losses and settlement expense reserve balances for the years ended December 31, 2022 and 2021, prepared in accordance with GAAP.

 

(In thousands)

 

2022

   

2021

 

Unpaid losses and settlement expense - beginning of the period:

               

Gross

  $ 61,835     $ 61,576  

Less: Ceded

    14,521       13,020  

Net

    47,314       48,556  

Increase in incurred losses and settlement expense:

               

Current year

    39,434       33,968  

Prior years

    5,099       732  
      44,533       34,700  

Deduct: Loss and settlement expense payments for claims incurred:

               

Current year

    16,512       14,740  

Prior years

    21,331       21,203  

Total paid

    37,843       35,943  

Net unpaid losses and settlement expense - end of the period

    54,004       47,314  

Plus: Reinsurance recoverable on unpaid losses

    13,610       14,521  

Gross unpaid losses and settlement expense - end of the period

  $ 67,614     $ 61,835  

 

The estimation process for determining the liability for unpaid losses and settlement expense inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable or adverse development).

 

Reconciliation of Reserve for Loss and Settlement Expenses

 

The following table shows the development of our reserves for unpaid loss and settlement expense from 2013 through 2022 on a GAAP basis. The top line of the table shows the liabilities at the balance sheet date, including losses incurred but not yet reported. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. The redundancy (deficiency) exists when the re-estimated liability for each reporting period is less (greater) than the prior liability estimate. The “cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.

 

Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent of applicable reinsurance.

 

 

As noted in the table below, since 2013 the Company has principally selected initial ultimate loss picks that have proven to be deficient over time.

 

                                                                                 

(In thousands)

 

2013

   

2014

   

2015

   

2016

   

2017

   

2018

   

2019

   

2020

   

2021

   

2022

 

Liability for unpaid loss and settlement expense, net of reinsurance recoverable

  $ 36,340     $ 38,795       41,898       40,702       41,048       44,714       45,806       48,556       47,314       54,004  

Cumulative amount of liability paid through:

                                                                               

One year later

    12,509       14,088       17,686       16,841       17,122       17,311       16,737       21,069       21,331          

Two years later

    22,677       26,877       29,066       26,640       28,219       27,719       31,494       34,604                

Three years later

    29,923       34,742       35,548       34,275       34,955       37,103       40,831                      

Four years later

    33,651       37,926       39,047       37,901       41,195       43,744                            

Five years later

    35,207       39,452       40,592       41,480       45,513                                  

Six years later

    36,053       40,224       41,701       43,341                                        

Seven years later

    36,356       40,676       42,673                                              

Eight years later

    36,780       41,105                                                    

Nine years later

    36,858                                                          
                                                                                 

Liability estimated after:

                                                                               

One year later

    36,765       38,237       40,417       39,667       42,525       44,839       46,993       49,155       52,413          

Two years later

    36,209       39,598       42,176       41,573       44,176       45,631       49,785       51,436                

Three years later

    36,766       41,569       42,294       43,011       45,156       47,830       50,772                      

Four years later

    37,274       41,348       43,108       43,772       47,448       48,926                            

Five years later

    36,958       41,519       43,155       45,177       48,846                                  

Six years later

    37,045       41,355       43,770       45,624                                        

Seven years later

    36,924       41,504       43,962                                              

Eight years later

    37,090       41,660                                                    

Nine years later

    37,178                                                          
      -                                                                          
      -                                                                          

Cumulative total redundancy (deficiency):

                                                                               

Gross liability - end of year

    57,334       64,618       61,054       52,817       51,071       51,445       56,838       61,576       61,835       67,614  

Reinsurance recoverable

    20,994       25,823       19,156       12,115       10,030       6,736       11,036       13,020       14,521       13,610  

Net liability - end of year

    36,340       38,795       41,898       40,702       41,041       44,709       45,802       48,556       47,314       54,004  
                                                                                 

Gross re-estimated liability - latest

    58,456       68,147       61,653       56,553       57,714       58,225       61,319       66,021       64,068          

Re-estimated reinsurance recoverables - latest

    21,278       26,487       17,691       10,929       8,868       9,299       10,547       14,585       11,655          

Net re-estimated liability - latest

    37,178       41,660       43,962       45,624       48,846       48,926       50,772       51,436       52,413          
                                                                                 

Gross cumulative redundancy (deficiency)

    (1,122 )     (3,529 )     (599 )     (3,736 )     (6,643 )     (6,780 )     (4,481 )     (4,445 )     (2,233 )        

Net cumulative redundancy (deficiency)

    (838 )     (2,865 )     (2,064 )     (4,922 )     (7,805 )     (4,217 )     (4,970 )     (2,880 )     (5,099 )        

 

 

Investments

 

Our investments in debt are classified as available for sale (AFS) and are carried at fair value with unrealized gains and losses reflected as a component of comprehensive earnings and equity net of deferred taxes. Our investments in equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings. The goal of our investment activities is to complement and support our overall mission. As such, the investment portfolio’s goal is to maximize after-tax investment income and price appreciation while maintaining the portfolio’s target risk profile.

 

An important component of our operating results has been the return on invested assets. Our investment objectives are (i) to preserve and grow capital and surplus, in order to improve our competitive position and allow for expansion of insurance operations; (ii) to ensure sufficient cash flow and liquidity to fund expected liability payments and otherwise support our underwriting strategy; (iii) to provide a reasonable and stable level of income; and (iv) to maintain a portfolio which will assist in attaining the highest possible rating from A.M. Best. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Information about Market Risk.

 

In addition to any investments prohibited by the insurance laws and regulations of Illinois and any other applicable states, our investment policy prohibits the following investments and investing activities:

 

 

short sales;

 

purchase of securities on margin;

 

hedge funds;

 

derivatives;

 

investment in commodities;

 

mortgage derivatives such as inverse floaters, interest only strips and principal only strips;

 

options, puts and futures contracts;

 

private placements; and

 

non-U.S. dollar denominated securities.

 

Our board of directors developed our investment policy and reviews the policy periodically. Exceptions to prohibitions discussed above are allowed only with express authorization by the board of directors' investment committee, but under no circumstance may such exception exceed 5% of our invested assets.

 

Our investment portfolio is managed by two independent third party firms. The board of director's investment committee reviews the performance of each firm periodically.

 

The following table sets forth information concerning our investments in available for sale (AFS) securities, as of December 31:

 

   

2022

 

(In thousands)

 

Amortized Cost

   

Estimated Fair Value

 

Fixed maturity securities

               

U.S. Treasury

  $ 1,353     $ 1,253  

MBS/ABS/CMBS

    41,859       38,803  

Corporate

    39,716       35,602  

Municipal

    21,437       17,542  

Redeemable preferred stock

    216       189  

Total AFS securities

  $ 104,581     $ 93,389  

 

   

2021

 

(In thousands)

 

Amortized Cost

   

Estimated Fair Value

 

Fixed maturity securities

               

U.S. Treasury

  $ 1,352     $ 1,346  

MBS/ABS/CMBS

    40,712       41,024  

Corporate

    38,960       41,207  

Municipal

    20,905       22,032  

Redeemable preferred stock

    216       233  

Total AFS securities

  $ 102,145     $ 105,842  

 

 

The following table summarizes the distribution of our portfolio of fixed maturity investments as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Corporation (S&P), as of December 31:

 

   

2022

   

2021

 

Rating1

 

Estimated Fair Value (In thousands)

   

Percent of Total2

   

Estimated Fair Value (In thousands)

   

Percent of Total2

 

AAA

  $ 19,985       21.4 %   $ 25,582       24.2 %

AA

    33,620       36.0 %     33,975       32.1 %

A

    23,160       24.8 %     26,619       25.2 %

BBB

    13,355       14.3 %     17,686       16.7 %

BB

    3,269       3.5 %     1,980       1.9 %

Total

  $ 93,389       100.0 %   $ 105,842       100.0 %

 

The ratings set forth in this table are based on the ratings assigned by S&P. If S&P’s ratings were unavailable, the equivalent ratings supplied by Moody’s Investor Service, Fitch Investors Service, Inc. or the NAIC were used where available.

Represents percent of fair value for classification as a percent of the total portfolio.

 

The table below sets forth the maturity profile of our debt securities, as of December 31, 2022. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

 

(In thousands)

 

Amortized Cost

   

Estimated Fair Value1

 

Less than one year

  $ 250     $ 247  

One through five years

    16,294       15,551  

Five through ten years

    19,109       16,765  

Greater than ten years

    26,853       21,834  

MBS/ABS

    41,859       38,803  

Redeemable preferred stock

    216       189  

Total debt securities

  $ 104,581     $ 93,389  

 

Debt securities are carried at fair value in our financial statements

 

At December 31, 2022, the average maturity of our fixed maturity investment portfolio was 9.06 years, and the average duration was 5.37 years. As a result, the fair value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

 

We use quoted values and other data provided by independent pricing services as inputs in our process for determining fair values of our investments. The pricing services cover substantially all the securities in our portfolio for which publicly quoted values are not available. The pricing services’ evaluations represent an exit price, a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active, quoted prices for similar securities at the measurement date, or other inputs that are observable.

 

Our independent third-party investment managers provide us with pricing information that they obtain from independent pricing services, to determine the fair value of our fixed maturity securities. After performing a detailed review of the information obtained from the pricing service, limited adjustments may be made by the managers to the values provided.

 

Our average cash and invested assets, net investment income and return on average cash and invested assets, for the years ended December 31, 2022 and 2021 were as follows:

 

(In thousands)

 

2022

   

2021

 

Average cash and invested assets

  $ 137,949     $ 140,677  

Net investment income

    4,034       3,414  

Return on average cash and invested assets

    2.9 %     2.4 %

 

 

A.M. Best Rating

 

A.M. Best Company, Inc. (“A.M. Best”) rates insurance companies based on factors of concern to policyholders. A.M. Best currently assigns a “A-” (Excellent) rating to ICC. This rating is the fourth highest out of 15 rating classifications. We expect that the next rating evaluation by A.M. Best is occurring on or about May 4, 2023, and therefore the report from this evaluation has not yet been released. According to the A.M. Best guidelines, companies rated “A-” are considered by A.M. Best to have “an excellent ability to meet their ongoing insurance obligations.” The rating evaluates the claims paying ability of a company and is not a recommendation on the merits of an investment in our common stock.

 

In evaluating a company’s financial and operating performance, A.M. Best reviews:

 

 

the company’s profitability, leverage and liquidity;

 

its book of business;

 

the adequacy and soundness of its reinsurance;

 

the quality and estimated fair value of its assets;

 

the adequacy of its reserves and surplus;

 

its capital structure;

 

the experience and competence of its management; and

 

its marketing presence.

 

In its ratings report on ICC, A.M. Best stated that ICC’s rating reflected ICC’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management. A.M. Best also stated that ICC’s balance sheet reflects the company’s strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), its favorable underwriting leverage measures compared with the commercial casualty composite averages, and its conservative reserving practices. A.M. Best has assigned the Parent Company’s outlook to the Issuer Credit Rating as stable.

 

Competition

 

Given our exclusive focus on providing insurance products and services for the food and beverage industry, the market conditions for our business and, accordingly, our competition, varies geographically based upon the states in which we operate and also by the segment of the food and beverage industry (e.g., bars versus fine dining). When evaluating the franchise and fine dining segment of the food and beverage industry, we compete with national insurance carriers, such as Allied Insurance Company, Travelers Insurance Company and The Hartford Insurance Company. For risks with greater alcohol and entertainment exposures, competition for liquor liability comes from primarily excess and surplus lines companies such as USLI and Conifer. In some states (Illinois, Indiana, Iowa, Minnesota and Wisconsin) competition is primarily from Midwest based regional carriers, such as Society Mutual Insurance Company, Badger Mutual Insurance Company, Midwest Family Mutual Insurance Company, SPRISKA and West Bend Mutual Insurance Company, with products targeting the food and beverage industry. Because of the challenging judicial climate in Missouri, we do not face much competition from the larger regional or national insurance companies. Most competitors are excess and surplus lines companies (E&S) especially for risks with higher alcohol sales or entertainment. In our eastern-most states of Michigan, Ohio and Pennsylvania, the primary competitors are well established national carriers with a strong presence in those states such as Auto Owners, Erie and Cincinnati. In our most western states of Arizona and Colorado, we initially found market opportunities due to a lack of strong regional competition although the landscape has changed in both states. Society Mutual and SPRISKA are now in Colorado and Badger Mutual and SPRISKA are aggressive in Arizona. We are entering Utah at a time when we are seeing other competitors reduce their appetite in that state. 

 

 

Despite significant competition, we believe we continue to maintain strong market share.

 

   

Number of Eating and Drinking Places in 2022

   

Number of Locations Insured by ICC at December 31, 2022

   

Approximate Market Share (%)

 

Arizona

    11,270       549       4.9 %

Colorado

    12,624       1,163       9.2 %

Illinois

    26,033       3,538       13.6 %

Iowa

    6,429       2,447       38.1 %

Indiana

    12,443       886       7.1 %

Kansas

    5,351       154       2.9 %

Michigan

    17,350       641       3.7 %

Minnesota

    10,632       1,600       15.0 %

Missouri

    11,738       1,574       13.4 %

Ohio

    23,676       1,018       4.3 %

Pennsylvania

    26,160       440       1.7 %

Utah

    5,686       4       0.1 %

Wisconsin

    12,739       372       2.9 %

Total

    182,131       14,386       7.9 %

 

Talent

 

We recognize that our employees are our most valuable asset. We are committed to building an inclusive and diverse workforce and promoting a culture of respect where individual viewpoints are heard. The Company’s Chief Human Resources Officer (CHRO), with oversight by the executive team, leads our talent management initiatives. The CHRO’s key responsibilities include developing programs that advocate diversity, equity and inclusion within the Company’s recruiting, selection, training and development practices.

 

The Company’s Total Rewards program is a competitive compensation package that supports the Company’s commitment to attracting and retaining a talented workforce. In addition to base salaries or hourly wages, Total Rewards includes an annual profit-sharing incentive for all employees, an executive long-term incentive plan, and retirement, health, disability and life insurance benefits. Local, regional and national compensation surveys are used by the Human Resources Department to ensure a competitive compensation package exists for the Company’s positions.

 

An important component of the annual profit-sharing incentive is the Company’s Employee Stock Ownership Plan (ESOP), a qualified retirement plan that grants shares of the Company’s stock to eligible employees. The ESOP provides an avenue for employees to actively participate in building value in alignment with the interests of other shareholders. In addition to the ESOP, certain members of management participate in a discretionary bonus program where restricted stock units are awarded annually.

 

As of December 31, 2022, we had 102.5 full-time equivalent employees. None of these employees are covered by a collective bargaining agreement, and we believe that our employee relations are good.

 

Regulation

 

General

 

We are subject to extensive regulation, particularly at the state level. The method, extent and substance of such regulation varies by state, but generally has its source in statutes and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to state insurance regulatory agencies. In general, such regulation is intended for the protection of those who purchase or use insurance products, not the companies that write the policies. These laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing, trade practices, reserve adequacy and underwriting standards.

 

 

State insurance laws and regulations require ICC to file financial statements with state insurance departments everywhere it does business, and the operations of ICC and its accounts are subject to examination by those departments at any time. ICC prepares statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments.

 

Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in which our subsidiaries write insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. States require rates for property-casualty insurance that are adequate, not excessive, and not unfairly discriminatory.

 

Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or non-renew policies. Laws and regulations that limit cancellation and non-renewal may restrict our ability to exit unprofitable marketplaces in a timely manner.

 

Examinations

 

Examinations are conducted by the Illinois Department of Insurance every three to five years. The Illinois Department of Insurance's last completed its last examination of ICC in November 2017 covering the period from 2012-2016. The report from this exam became available to other states or the public on May 16, 2018. The 2016 examination did not result in any adjustments to our financial position. In addition, there were no substantive qualitative matters indicated in the examination report that had a material adverse impact on our operations. We are currently undergoing an examination that began in October 2022 covering the periods 2017-2021.

 

NAIC Risk-Based Capital Requirements

 

In addition to state-imposed insurance laws and regulations, the NAIC has adopted risk-based capital requirements that require insurance companies to calculate and report information under a risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. Under the formula, a company first determines its “authorized control level” risk-based capital. This authorized control level takes into account (i) the risk with respect to the insurer’s assets; (ii) the risk of adverse insurance experience with respect to the insurer’s liabilities and obligations, (iii) the interest rate risk with respect to the insurer’s business; and (iv) all other business risks and such other relevant risks as are set forth in the risk-based capital instructions. A company’s “total adjusted capital” is the sum of statutory capital and surplus and such other items as the risk-based capital instructions may provide. The formula is designed to allow state insurance regulators to identify weakly capitalized companies.

 

The requirements provide for four different levels of regulatory attention. The “company action level” is triggered if a company’s total adjusted capital is less than 2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level, the company must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to improve the capital position. The “regulatory action level” is triggered if a company’s total adjusted capital is less than 1.5 times but greater than or equal to 1.0 times its authorized control level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The “authorized control level” is triggered if a company’s total adjusted capital is less than 1.0 times but greater than or equal to 0.7 times its authorized control level; at this level, the regulatory authority may take action it deems necessary, including placing the company under regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 0.7 times its authorized control level; at this level, the regulatory authority is mandated to place the company under its control. The capital levels of ICC have never triggered any of these regulatory capital levels. We cannot provide assurance, however, that the capital requirements applicable to ICC will not increase in the future.

 

NAIC Ratios

 

The NAIC also has developed a set of 13 financial ratios referred to as the Insurance Regulatory Information System (IRIS). On the basis of statutory financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. If four or more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from individual state insurance departments. During the years ended December 31, 2022 and 2021, ICC did not receive inquiries from regulators on results for any of the IRIS tests.

 

 

Enterprise Risk Assessment

 

In 2012, the NAIC adopted the NAIC Amendments. The NAIC Amendments, when adopted by the various states, are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. One of the major changes is a requirement that an insurance holding company system’s ultimate controlling person submit annually to its lead state insurance regulator an “enterprise risk report” that identifies activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. Other changes include requiring a controlling person to submit prior notice to its domiciliary insurance regulator of its divestiture of control, having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator. In addition, in 2012 the NAIC adopted the Own Risk Solvency Assessment (ORSA) Model Act. The ORSA Model Act, when adopted by the various states, requires an insurance holding company system’s chief risk officer to submit at least annually to its lead state insurance regulator a confidential internal assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. Although ICC is exempt from ORSA because of its size, we have incorporated elements of ORSA, that we believe constitute “best practices,” into our annual internal enterprise risk assessment.

 

Market Conduct Regulation

 

State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.

 

Property and Casualty Regulation

 

Our property and casualty operations are subject to rate and policy form approval, as well as laws and regulations covering a range of trade and claim settlement practices. State insurance regulatory authorities have broad discretion in approving an insurer’s proposed rates. The extent to which a state restricts underwriting and pricing of a line of business may adversely affect an insurer’s ability to operate that business profitably in that state on a consistent basis.

 

State insurance laws and regulations require us to participate in mandatory property-liability “shared market,” “pooling” or similar arrangements that provide certain types of insurance coverage to individuals or others who otherwise are unable to purchase coverage voluntarily provided by private insurers. Shared market mechanisms include assigned risk plans and fair access to insurance requirement or “FAIR” plans. In addition, some states require insurers to participate in reinsurance pools for claims that exceed specified amounts. Our participation in these mandatory shared market or pooling mechanisms generally is related to the amount of our direct writings for the type of coverage written by the specific arrangement in the applicable state. We cannot predict the financial impact of our participation in these arrangements. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Guaranty Fund Laws

 

All states have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent insurance companies. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the years ended December 31, 2022 and 2021, we recovered $0 and incurred $18,000, respectively, in assessments pursuant to state insurance guaranty association laws. We establish reserves relating to insurance companies that are subject to insolvency proceedings when we are notified of assessments by the guaranty associations. We cannot predict the amount and timing of any future assessments on ICC under these laws. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Federal Regulation

 

The U.S. federal government generally has not directly regulated the insurance industry except for certain areas of the market, such as insurance for flood, nuclear and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may impact the insurance industry, including tort reform, corporate governance and the taxation of reinsurance companies. The Dodd-Frank Act established the Federal Insurance Office which is authorized to study, monitor and report to Congress on the insurance industry and to recommend that the Financial Stability Oversight Council designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer’s material financial distress or failure. In December 2013, the Federal Insurance Office issued a report on alternatives to modernize and improve the system of insurance regulation in the United States, including increasing national uniformity through either a federal charter or effective action by the states. Changes to federal legislation and administrative policies in several areas, including changes in federal taxation, can also significantly impact the insurance industry and us.

 

Sarbanes-Oxley Act of 2002

 

Enacted in 2002, the stated goals of the Sarbanes-Oxley Act of 2002, or SOX, are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We became subject to most of the provisions of the SOX immediately after completion of the mutual-to-stock conversion.

 

The SOX includes very specific disclosure requirements and corporate governance rules and requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related regulations.

 

Terrorism Risk Insurance Act of 2002

 

In January 2015 and December 2019, Congress passed the Terrorism Risk Insurance Program Reauthorization Act of 2015 and 2019, respectively, which amended and extended the Terrorism Insurance Program through December 31, 2027. Under this law, coverage provided by an insurer for losses caused by certified acts of terrorism is partially reimbursed by the United States under a formula under which the government pays 80% of covered terrorism losses exceeding a prescribed deductible. The act limits an insurer’s exposure to certified terrorist acts (as defined by the Act) to the prescribed deductible amount. The insurance industry’s aggregate deductible is $42.7 billion in 2022. Each insurer’s deductible is capped at 20% of the insurer’s direct earned premium for commercial property and casualty policies. Coverage under the act must be offered to all property, casualty and surety insureds.

 

The new law also amended the Gramm-Leach-Bliley Act to establish the National Association of Registered Agents and Brokers as a nonprofit corporation with the purpose of prescribing licensing and producer qualification requirements and conditions on a multi-state basis.

 

Privacy

 

As mandated by the Gramm-Leach-Bliley Act, states continue to promulgate and refine laws and regulations that require financial institutions, including insurance companies, to take steps to protect the privacy of certain consumer and customer information relating to products or services primarily for personal, family or household purposes. An NAIC initiative that affected the insurance industry was the adoption in 2000 of the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of customer information. We have implemented procedures to comply with the Gramm-Leach-Bliley Act’s related privacy requirements.

OFAC

 

The Treasury Department’s Office of Foreign Asset Control (OFAC) maintains a list of “Specifically Designated Nationals and Blocked Persons” (the SDN List). The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations or drug traffickers. OFAC’s regulations prohibit insurers, among others, from doing business with persons or entities on the SDN List. If the insurer finds and confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person and file a report with OFAC.

 

 

Dividends

 

Illinois law sets the maximum amount of dividends that may be paid by ICC during any twelve-month period after notice to, but without prior approval of, the Illinois Department of Insurance. This amount cannot exceed the greater of 10% of the insurance company’s surplus as regards policyholders as reported on the most recent annual statement filed with the Illinois Department of Insurance, or the insurance company’s statutory net income for the period covered by the annual statement as reported on such statement. As of December 31, 2022, the amount available for payment of dividends by ICC in 2023 without the prior approval of the Illinois Department of Insurance is approximately $6.0 million. “Extraordinary dividends” in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the Illinois Department of Insurance. See Item 7. Management Discussion and Analysis Liquidity and Capital Resources.

 

Holding Company Laws

 

Most states have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information. This includes information concerning the operations of companies within the holding company group that may materially affect the operations, management or financial condition of the insurers within the group. Pursuant to these laws, the Illinois Department of Insurance requires disclosure of material transactions involving ICC and its affiliates and requires prior notice and/or approval of certain transactions, such as “extraordinary dividends” distributed by ICC. Under these laws, the Illinois Department of Insurance also has the right to examine us at any time.

 

All transactions within our consolidated group affecting ICC must be fair and equitable. Notice of certain material transactions between ICC and any person or entity in our holding company system will be required to be given to the Illinois Department of Insurance. Certain transactions cannot be completed without the prior approval of the Illinois Department of Insurance.

 

Approval of the state insurance commissioner is required prior to any transaction affecting the control of an insurer domiciled in that state. In Illinois, the acquisition of 10% or more of the outstanding voting securities of an insurer or its holding company is presumed to be a change in control. Illinois law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire or acquiring any voting security of an Illinois insurer if, after the acquisition, the person or entity would be in control of the insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with an Illinois insurer, unless the offer, request, invitation, acquisition, effectuation or attempt has received the prior approval of the Illinois Department of Insurance.

 

 

 

Item 1A. Risk Factors

 

In addition to all other information contained in this Annual Report on Form 10-K, a potential investor should carefully consider the following risk factors in deciding whether to purchase our common stock.

 

Risks Related to Our Business

 

A reduction in our A.M. Best rating could affect our ability to write new business or renew our existing business.

 

Ratings assigned by A.M. Best are an important factor influencing the competitive position of insurance companies. A.M. Best ratings, which are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Therefore, our A.M. Best rating should not be relied upon as a basis for an investment decision to purchase our common stock.

 

ICC holds a financial strength rating of “A-“ (Excellent) by A.M. Best, the fourth highest rating out of 15 rating classifications. We expect that our upcoming evaluation by A.M. Best will occur on or about May 4, 2023, with the ratings from this evaluation being released thereafter. Our most recent prior evaluation occurred on July 19, 2022, when A.M. Best assigned its outlook as stable for ICC’s issuer credit rating and upgraded its financial strength rating to “A-“ from “B++” (Good) and upgraded its issuer credit rating to “a-“ from “bbb+”. Financial strength ratings are used by producers and customers as a means of assessing the financial strength and quality of insurers. Issuer credit ratings is an opinion by A.M. Best of an entity’s ability to meet its ongoing financial obligations. If our financial position deteriorates, we may not maintain our favorable financial strength and issuer credit ratings from A.M. Best. A downgrade of our rating could severely limit or prevent us from writing desirable business or from renewing our existing business. In addition, a downgrade could negatively affect our ability to implement our strategy. See Item 1. Business A.M. Best Rating.

 

Our revenues may fluctuate with our investment results and changes in interest rates.

 

Our investment portfolio contains a significant amount of fixed income securities. The fair values of these invested assets fluctuate depending upon economic conditions, particularly changes in interest rates. We may not be able to prevent or minimize the negative impact of interest rate changes on equity, for unrealized losses. Additionally, unforeseen circumstances may force us to sell certain of our invested assets at a time when their fair values are less than their original cost, resulting in realized capital losses, which would reduce our net earnings.

 

Our food and beverage customers have been the target of claims and lawsuits. Proceedings of this nature, if successful, could result in our payment of substantial costs and damages.

 

Occasionally, patrons of our food and beverage industry insured customers file complaints or lawsuits against our insureds alleging a variety of claims arising in the ordinary course of their business, including personal injury claims, contract claims and claims alleging violations of federal and state laws. In addition, certain of our insured customers who serve alcohol are subject to state “dram shop” or similar laws that generally allow a person to sue our customer if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages by our customer. A number of these lawsuits in the food and beverage industry have resulted in the payment of substantial damages by us on behalf of our insureds.

 

Additionally, states have, from time to time, explored lowering the blood alcohol content levels for criminal statutes related to driving under the influence or similar laws, removing or increasing caps for liability with respect to injuries by a legally intoxicated person, or preventing or limiting rate changes by insurance companies.

 

Regardless of whether any claims against our customers are valid or whether they are liable, claims may be expensive to defend and may result in significant liabilities. Defense costs, even for unfounded claims, or a judgment or other liability in excess of our reinsurance limits for any claims or any adverse publicity resulting from claims could adversely affect our business, results of operations and financial condition.

 

Our strategy for growing our business may not be profitable.

 

Over the past several years, we have made, and our current plans are to continue to make, investments in our lines of business, and we have increased expenses in order to, among other things, strengthen our product offerings and service capabilities, expand into new geographic areas, improve technology and our operating models, build expertise in our personnel, and expand our distribution capabilities, with the ultimate goal of achieving significant, sustained growth. The ability to achieve significant profitable premium growth in order to earn adequate returns on such investments and expenses, and to grow further without proportionate increases in expenses, is an important part of our current strategy. There can be no assurance that we will be successful at profitably growing our business, or that we will not alter our current strategy due to changes in our markets or an inability to successfully maintain acceptable margins on new business or for other reasons, in which case premiums written and earned, operating income and net book value could be adversely affected.

 

 

Our investment performance may suffer as a result of adverse capital market developments, which may affect our financial results and ability to conduct business.

 

We invest the premiums we receive from policyholders until cash is needed to pay insured claims or other expenses. We had net realized investment gains of $874,000 and $983,000 for the years ended December 31, 2022 and December 31, 2021, respectively. Our investments will be subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit risk. An unexpected increase in the volume or severity of claims may force us to liquidate securities, which may cause us to incur capital losses. If we do not structure the duration of our investments to match our insurance liabilities or sell securities at a time when such securities are in a loss position, we may be forced to liquidate investments prior to maturity at a significant loss to cover such payments. Investment losses could significantly decrease our asset base and statutory surplus, thereby affecting our ability to conduct business. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Information About Market Risk.

 

The geographic distribution of our business exposes us to significant natural disasters, which may negatively affect our financial and operating results.

 

For the year ended December 31, 2022, approximately 22.6% of our direct premiums written originated from business written in Illinois, and therefore, we have a greater exposure to catastrophic or other significant natural or man-made losses in that geographic region. The incidence and severity of such events are inherently unpredictable. In recent years, changing climate conditions have increased the unpredictability, severity and frequency of tornados, hurricanes, and other storms.

 

States and regulators from time to time have taken action that has the effect of limiting the ability of insurers to manage these risks, such as prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or mandating that insurers participate in residual markets. Our ability or willingness to manage our exposure to these risks may be limited due to considerations of public policy, the evolving political environment, or social responsibilities. We may choose to write business in catastrophe-prone geographic areas that we might not otherwise write for strategic purposes, such as improving our access to other underwriting opportunities.

 

Our ability to properly estimate reserves related to tornados and storms can be affected by the inability to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties, and the nature of the information available to establish the reserves. These complex factors include, but are not limited to the following:

 

 

determining whether damages were caused by flooding versus wind;

 

evaluating general liability and pollution exposures;

 

the impact of increased demand for products and services necessary to repair or rebuild damaged properties;

 

infrastructure disruption;

 

fraud;

 

the effect of mold damage;

 

business interruption costs; and

 

reinsurance collectability.

 

The estimates related to catastrophes are adjusted as actual claims are filed and additional information becomes available. This adjustment could reduce income during the period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations.

 

Large-scale natural disasters may have a material adverse effect on our business, financial condition and results of operations.

 

The Midwest has historically been at a relatively high risk of natural disasters such as tornados, blizzards and flooding. If the Midwest were to experience a large-scale natural disaster, claims incurred would likely increase and our insured’s properties may incur substantial damage, which could have a material adverse effect on our business, financial condition and results of operations.

 

 

Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may lead to reduced premium volume.

 

Results of companies in the insurance industry, and particularly the property and casualty insurance industry, historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

 

 

rising levels of actual costs that are not known by companies at the time they price their products;

 

volatile and unpredictable developments, including man-made and natural catastrophes;

 

changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and

 

fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of losses.

 

Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition (a so-called “soft market”), followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition (a so-called “hard market”). Fluctuations in underwriting capacity, demand and competition, and the impact on our business of the other factors identified above, could have a negative impact on our results of operations and financial condition.

 

Because estimating future losses is difficult and uncertain, if our actual losses exceed our loss reserves, our operating results may be adversely affected.

 

We maintain reserves to cover amounts we estimate will be needed to pay for insured losses and for the expenses necessary to settle claims. Estimating loss and loss expense reserves is a difficult and complex process involving many variables and subjective judgments. We regularly review our reserve estimate protocols and our overall amount of reserves. We review historical data and consider the impact of various factors such as:

 

 

trends in claim frequency and severity;

 

information regarding each claim for losses;

 

legislative enactments, judicial decisions and legal developments regarding damages; and

 

trends in general economic conditions, including inflation.

 

Our actual losses could exceed our reserves. If we determine that our loss reserves are inadequate, we will have to increase them. This adjustment would reduce income during the period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations. Such adjustments to loss reserve estimates are referred to as “loss development.” If existing loss reserves exceed the revised estimate, it is referred to as positive loss development. Negative loss development occurs when the revised estimate of expected losses with respect to a calendar year exceed existing loss reserves. For additional information, see Item 1. Business Loss and Settlement Expense Reserves.

 

If our reinsurers do not pay our claims in accordance with our reinsurance agreements, we may incur losses.

 

We are subject to loss and credit risk with respect to the reinsurers with whom we deal because buying reinsurance does not relieve us of our liability to policyholders. If our reinsurers are not capable of fulfilling their financial obligations to us, our insurance losses would increase. For the year ended December 31, 2022, we ceded 11.5% of our direct written premiums to our reinsurers. We secure reinsurance coverage from a number of reinsurers. The lowest A.M. Best rating issued to any of our reinsurers is “A-” (Excellent), which is the fourth highest of fifteen ratings. See Item 1. Business Reinsurance.

 

 

The property and casualty insurance market in which we operate is highly competitive, which limits our ability to increase premiums for our products and recruit new producers.

 

Competition in the property and casualty insurance business is based on many factors. These factors include the perceived financial strength of the insurer, premiums charged, policy terms and conditions, services provided, reputation, financial ratings assigned by independent rating agencies and the experience of the insurer in the line of insurance to be written. We compete with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. Many of these competitors have substantially greater financial, technical and operating resources than we have. Many of the lines of insurance we write are subject to significant price competition. If our competitors price their products aggressively, our ability to grow or renew our business may be adversely affected. We pay producers on a commission basis to produce business. Some of our competitors may offer higher commissions or insurance at lower premium rates through the use of salaried personnel or other distribution methods that do not rely on independent agents. Increased competition could adversely affect our ability to attract and retain business and thereby reduce our profits from operations.

 

Our results of operations may be adversely affected by any loss of business from key producers.

 

Our products are primarily marketed by independent agents. Other insurance companies compete with us for the services and allegiance of these producers. These producers may choose to direct business to our competitors or may direct less desirable risks to us. We had two producers that were responsible for more than 5% of our direct premiums written. These producers accounted for $11.9 million or approximately 14.4% of our direct premiums written in 2022. No other producers accounted for more than 5% of our 2022 direct premiums written. If we experienced a significant decrease in business from, or lose entirely, our largest producers, it would have a material adverse effect on us.

 

Proposals to federally regulate the insurance business could affect our business.

 

Currently, the U.S. federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed. These proposals generally would maintain state-based regulation of insurance but would affect state regulation of certain aspects of the insurance business, including rates, producer and company licensing, and market conduct examinations. We cannot predict whether any of these proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws may have on our business, financial condition or results of operations.

 

If we fail to comply with insurance industry regulations, or if those regulations become more burdensome, we may not be able to operate profitably.

 

We are regulated by the Illinois Department of Insurance, as well as, to a more limited extent, the federal government and the insurance departments of other states in which we do business. For the year ended December 31, 2022, approximately 22.6% of our direct premiums written originated from business written in Illinois. Therefore, the cancellation or suspension of our license in Illinois, as a result of any failure to comply with the applicable insurance laws and regulations, may negatively impact our operating results.

 

Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations relate to, among other things:

 

 

approval of policy forms and premium rates;

 

standards of solvency, including establishing requirements for minimum capital and surplus, and for risk-based capital;

 

classifying assets as admissible for purposes of determining solvency and compliance with minimum capital and surplus requirements;

 

licensing of insurers and their producers;

 

 

 

advertising and marketing practices;

 

restrictions on the nature, quality and concentration of investments;

 

assessments by guaranty associations and mandatory pooling arrangements;

 

restrictions on the ability to pay dividends;

 

restrictions on transactions between affiliated companies;

 

restrictions on the size of risks insurable under a single policy;

 

requiring deposits for the benefit of policyholders;

 

requiring certain methods of accounting;

 

periodic examinations of our operations and finances;

 

claims practices;

 

prescribing the form and content of reports of financial condition required to be filed; and

 

requiring reserves for unearned premiums, losses and other purposes.

 

The Illinois Department of Insurance also conducts periodic examinations of the affairs of insurance companies and requires the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. Our last completed examination by the Illinois Department of Insurance was in November 2017.

 

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business.

 

Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.

 

Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.

 

It is also possible that the losses we experience on risks we have reinsured will exceed the coverage limits on the reinsurance. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.

 

 

The Company relies on information technology and telecommunication systems, and the disruption or failure of these systems, or the compromise of the security of the systems that results in the misuse of confidential information, could materially and adversely affect its business.

 

The Company’s business is highly dependent upon the successful and uninterrupted functioning of the information technology and telecommunications systems of ICC and its third-party vendors. We have established security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Our employees participate in ongoing security awareness training focused on the prevention and identification of possible threats. We also have security measures in place which are focused on the prevention, detection and remediation of damage from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions.

 

Despite these efforts, our systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. Information technology security threats from user error to cybersecurity attacks are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. No cybersecurity attack has had a material impact on our financial condition, results of operations or liquidity. However, the potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs. A sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or perform other necessary business functions. We could also be subject to fines and penalties from a security breach. The cost to remedy a severe breach could be substantial.

 

We could be adversely affected by the loss of our existing management or key employees.

 

The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers. Our business may be adversely affected if labor market conditions make it difficult for us to replace our current key officers with individuals having equivalent qualifications and experience at compensation levels competitive for our industry. In particular, because of the shortage of experienced underwriters and claims personnel who have experience or training in the liquor liability sector of the insurance industry, replacing key employees in that line of our business could be challenging. Our key officers include Arron K. Sutherland, our President and Chief Executive Officer, Michael R. Smith, our Vice President – Chief Financial Officer, Norman D. Schmeichel, our Vice President – Chief Information Officer, Howard J. Beck, our Vice President – Chief Underwriting Officer, Julia B. Suiter, our Vice President – Chief Legal Officer, and Kathleen S. Springer, our Vice President – Chief Human Resources Officer. These key officers have an average of more than 23 years of experience in the property and casualty insurance industry.

 

We do not have agreements not to compete or employment agreements with our employees, except for our employment agreement with Mr. Sutherland and change in control agreements with certain officers, including Messrs. Smith, Schmeichel, and Beck, and Mesdames Suiter and Springer. Our employment agreement with Mr. Sutherland and change in control agreements have change of control provisions that provide for certain payments and the continuation of certain benefits in the event such officer is terminated without cause, or such officer voluntarily quits for good reason after a change in control.

 

Losses resulting from political instability, acts of war or terrorism may negatively affect our financial and operating results.

 

Numerous classes of business are exposed to terrorism related catastrophic risks. The frequency, number and severity of these losses are unpredictable. As a result, we have changed our underwriting protocols to address terrorism and the limited availability of terrorism reinsurance. However, given the uncertainty of the potential threats, we cannot be sure that we have addressed all the possibilities.

 

The Terrorism Risk Insurance Act of 2002, as extended by the Terrorism Risk Insurance Program Reauthorization Acts of 2015 and 2019, is effective through December 31, 2027. Prior to the act, insurance coverage from private insurers for losses (other than workers’ compensation) arising out of acts of terrorism was severely limited. The act provides, among other things, that all licensed insurers must offer coverage on most commercial lines of business for acts of terrorism. Losses arising out of acts of terrorism that are certified as such by the Secretary of the Treasury of the United States (in consultation with the Secretary of Homeland Security) and that exceed $200 million in any year will be reimbursed by the federal government subject to a limit of $100 billion. Each insurance company is responsible for a deductible equal to 20% of its direct earned premiums in the previous calendar year, up to the insurer’s proportionate share of the $100 billion. Our deductible is approximately $15.68 million for 2022. For losses in excess of the deductible, the federal government will reimburse 80% of the insurer’s loss.

 

 

Notwithstanding the protection provided by reinsurance and the Terrorism Risk Insurance Act of 2002, the risk of severe losses to us from acts of terrorism has not been eliminated. Our reinsurance contracts include various limitations or exclusions limiting the reinsurers’ obligation to cover losses caused by acts of terrorism. Accordingly, events constituting acts of terrorism may not be covered by, or may exceed the capacity of, our reinsurance and could adversely affect our business and financial condition

 

We could be adversely affected by any interruption to our ability to conduct business at our current location.

 

Our business operations could be substantially interrupted by flooding, snow, ice, and other weather-related incidents, or from fire, power loss, telecommunications failures, terrorism, or other such events. In such an event, we may not have sufficient redundant facilities to cover a loss or failure in all aspects of our business operations and to restart our business operations in a timely manner. Any damage caused by such a failure or loss may cause interruptions in our business operations that may adversely affect our service levels and business. See Item 1. Business Technology.

 

Changes in accounting standards issued by the Financial Accounting Standards Board (FASB) or other standard-setting bodies may adversely affect our consolidated financial statements.

 

Our consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material effect on our financial condition and results of operations.

 

Assessments and premium surcharges for state guaranty funds, second injury funds and other mandatory pooling arrangements may reduce our profitability.

 

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. Some states also have laws that establish second injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on incurred losses. See Item 1. Business Regulation.

 

In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. At December 31, 2022, we participated in mandatory pooling arrangements in six states. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Our operations in Mexico expose us to additional risks, which could negatively impact our business, operating results and financial condition.

 

The Company utilizes resources in Mexico through operations at Estrella. These operations expose us to additional risks including currency exchange rate fluctuations. The Company is paid and is billed for services in U.S. dollars based on the exchange rate to the Mexican Peso. Any changes to the exchange rate could adversely affect our business and financial condition.

 

 

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results.

 

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002, as applicable to smaller reporting companies, which requires management to assess the effectiveness of internal controls. As described in Item 9A of Part II of this Annual Report on Form 10-K, management concluded that our disclosure controls and procedures were effective as of December 31, 2022. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses identified or that we may identify in the future, or that we will implement and maintain adequate controls over our financial process and reporting in the future.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are required to prepare assessments regarding internal control over financial reporting and furnish a report by our management on our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

 

Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses or to implement new or improved controls could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

 

Risk Factors Related to Ownership of Our Common Stock

 

A small number of shareholders collectively own a substantial portion of our common stock and voting power, and, because of restrictions on their ability to buy or sell our shares, our public float will be limited.

 

Collectively, the three investors who purchased shares from us pursuant to investment agreements (the Clinton-Flood Purchasers, Stillwell Value Partners, and Rock Island Investors, LLC) own or exercise voting and investment control of 1.0 million of our shares, or 31.9% of our outstanding common stock. Pursuant to their respective purchase agreement, each investor has agreed to, among other things, vote as recommended by our board of directors (subject to limited exceptions), agree to a standstill provision, including from purchasing shares of our common stock except as provided by a contractual preemptive right, until March 2024, and agreed to restrictions on their respective ability to sell their shares of our common stock.

 

If and for so long as an investor beneficially owns two percent (2.0%) or more of the shares of our common stock and a standstill termination event has not occurred, the investor shall generally vote and cause to be voted all shares of common stock beneficially owned by such investor (a) for persons nominated and recommended by ICC Holdings’ Board of Directors for election as directors of ICC Holdings’ Board of Directors and against any person nominated for election as a director by any other person or entity, and (b) as directed or recommended by ICC Holdings’ Board of Directors with respect to any proposal presented at any meeting of ICC Holdings’ shareholders, including, but not limited to (i) the entire slate of directors recommended for election by the ICC Holdings’ Board of Directors to the shareholders of ICC Holdings at any meeting of ICC Holdings’ shareholders at which any directors are elected, (ii) any shareholder proposal submitted for a vote at any meeting of ICC Holdings’ shareholders, and (iii) any proposal submitted by ICC Holdings for a vote at any meeting of ICC Holdings’ shareholders relating (A) to the appointment of ICC Holdings’ accountants, or (B) an equity compensation plan of ICC Holdings and/or any material revisions thereto. This provision may have the effect of entrenching our board of directors and management team and may deprive a shareholder of the opportunity to sell shares to potential acquirers at a premium over prevailing prices. As a result, other shareholders may be prevented from affecting matters involving our company, including:

 

 

the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers;

 

any determinations with respect to mergers or other business combinations;

 

our acquisition or disposition of assets; and

 

our corporate financing activities.

 

 

Furthermore, this concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our shareholders. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of shareholders.

 

In addition, these investors are restricted from buying or selling shares of our common stock pursuant to their respective investment agreements and, in some cases, by restrictions under applicable securities laws. For three years following the closing, each of the investors are generally prohibited from selling any shares of our common stock. Effective March 2020, the third anniversary of the closing date, subject to our right of first refusal in favor of us, each investor is authorized to sell no more than six and one-quarter percent (6-1/4%) of the number of shares purchased at the closing of the offering every ninety days. Upon the occurrence of a death or disability of R. Kevin Clinton, no more than six and one-quarter percent (6-1/4%) of the number of shares purchased at the closing of the offering by R. Kevin Clinton and certain other purchasers who together purchased 800,000 shares of our common stock every ninety days by their trusts, estate or spouse could be sold beginning, unless an earlier date has been approved by a majority of the members of our board of directors other than R. Kevin Clinton or his replacement on our board of directors, (a) one year following such occurrence, if such event occurs during the first year following the closing date, (b) six months following such occurrence, if such event occurs during the second year following the closing date, or (c) following such occurrence, if such event occurs during the third year following the closing date. Until the expiration of the standstill provision discussed below, each investor is restricted from buying any shares of our common stock other than those acquired pursuant to their respective investment agreements and pursuant to their respective preemptive right thereunder. As a result, the liquidity of our common stock relative to what it would have been had these shares been purchased by other investors may be reduced.

 

For so long as an investor beneficially owns two percent (2.0%) or more of the issued and outstanding shares of our common stock, these standstill provisions will continue until the earliest of (a) the seventh anniversary of the closing of the offering, or (b) the date on which ICC Holdings includes a balance sheet in a filing with the SEC in which its “adjusted shareholders’ equity” at the end of such fiscal quarter is less than 85% of the “starting shareholders’ equity”. We received gross proceeds of $35.0 million in the offering, using information as of December 31, 2016 as the starting shareholders’ equity, the adjusted shareholders equity would have to be $9.5 million lower in order to trigger a termination of the standstill provisions. Following the expiration of the standstill provision in March 2024 and other provisions, if these investors retain their ownership levels, such investors together may be able to exhibit significant control over us and our management and will have significant influence over matters requiring shareholder approval, including future amendments to our amended and restated articles of incorporation or other significant or extraordinary transactions. The interests of these investors may differ from the interests of our other shareholders with respect to certain matters.

 

Our Employee Stock Ownership Plan (ESOP) and stock-based incentive plan will increase our costs, which will reduce our income.

 

As of December 31, 2022, our ESOP holds 11.1% of our outstanding shares of common stock, with such shares acquired with funds borrowed from us prior to the expiration of our IPO. The cost of acquiring the shares of common stock for the ESOP, and therefore the amount of the loan, was $3.5 million. The loan will be repaid over a fifteen-year period. We record employee stock ownership plan expense in an amount equal to the fair value of the shares of common stock committed to be released to employees under the ESOP for each year. If shares of our common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

 

Our board of directors adopted a stock-based incentive plan that was submitted to, and approved by, our shareholders in 2017. Under this plan, we may award participants restricted shares of our common stock, restricted stock units denominated in shares of our common stock, or options to purchase shares of our common stock. Restricted stock and restricted stock unit awards will be made at no cost to the participants. Restricted stock units are payable in shares of common stock or in cash in the discretion of the compensation committee. The number of shares of common stock that may be issued pursuant to restricted stock and restricted stock unit awards (to the extent that such restricted stock unit awards are not paid in cash) or upon exercise of stock option awards under the stock-based incentive plan may not exceed 10% and 4%, respectively, of the total number of shares sold in the offering.

 

The costs associated with the grant of restricted stock awarded under the stock-based incentive plan will be recognized and expensed over the vesting period of the award at the fair market value of the shares on the date they are awarded. The costs associated with the grant of restricted stock unit awards to be settled in cash will similarly be recognized and expensed over their vesting period at the fair market value of the shares on the date they are awarded. However, unlike awards of restricted stock, the fair market value will be remeasured on a quarterly basis until the award vests or is otherwise settled. Therefore, in addition to reducing our net earnings by recording this compensation and benefit expense, increases in our stock price will increase this expense for restricted stock unit awards settled in cash, thereby further reducing our net earnings.

 

 

Finally, accounting rules require companies to recognize as compensation expense the award-date fair value of stock options. This compensation expense will be recognized over the appropriate service period. When we record an expense for the award of options using the fair value method, we will incur significant compensation and benefits expense, which will reduce our net earnings.

 

The price of our common stock may decline.

 

The price of shares of our common stock may decline for many reasons, some of which are beyond our control, including among others:

 

 

Capital market conditions generally;

 

quarterly variations in our results of operations;

 

changes in expectations as to our future results of operations, including financial estimates by securities analysts and investors;

 

announcements by third parties of claims against us;

 

changes in law and regulation;

 

results of operations that vary from those expected by investors; and

 

future sales of shares of our common stock.

 

In addition, the stock market routinely experiences substantial price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of companies. As a result, the trading price of shares of our common stock may decline and a shareholder may not be able to sell shares at or above the price paid to purchase them.

 

Statutory provisions and our articles and bylaws may discourage takeover attempts on the Company that shareholders may believe are in their best interests or that might result in a substantial profit to them.

 

We are subject to provisions of Pennsylvania corporate law and Illinois insurance law that hinder a change of control. Illinois law requires the Illinois Department of Insurance’s prior approval of a change of control of an insurance holding company. Under Illinois law, the acquisition of 10% or more of the outstanding voting stock of an insurer or its holding company is presumed to be a change in control. Approval by the Illinois Department of Insurance may be withheld even if the transaction would be in the shareholders’ best interest if the Illinois Department of Insurance determines that the transaction would be detrimental to policyholders.

 

Our articles of incorporation and bylaws also contain provisions that may discourage a change in control. These provisions include:

 

a prohibition on a person, including a group acting in concert, from acquiring voting control of more than 10% of our outstanding stock without prior approval of the board of directors;

 

a classified board of directors divided into three classes serving for successive terms of three years each;

 

the prohibition of cumulative voting in the election of directors;

 

the requirement that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any annual meeting must be made by notice (in writing) delivered or mailed to us not less than 90 days prior to the meeting;

 

the prohibition of shareholders’ action without a meeting and of shareholders’ right to call a special meeting;

 

unless otherwise waived by the board of directors, to be elected as a director, a person must be a shareholder of ICC Holdings, Inc. for the lesser of one year or the time that has elapsed since the completion of the conversion;

 

the requirement imposing a mandatory tender offering requirement on a shareholder that has a combined voting power of 25% or more of the votes that our shareholders are entitled to cast;

 

 

 

the requirement that certain provisions of our articles of incorporation can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, unless approved by an affirmative vote of at least 80% of the members of the board of directors; and

 

the requirement that certain provisions of our bylaws can only be amended by an affirmative vote of shareholders entitled to cast at least 66 2/3%, or in certain cases 80%, of all votes that shareholders are entitled to cast.

 

These provisions may serve to entrench management and may discourage a takeover attempt that a shareholder may consider to be in his or her best interest or in which the shareholder would receive a substantial premium over the current market price. These provisions may make it extremely difficult for any one person, entity or group of affiliated persons or entities to acquire voting control of the Company, with the result that it may be extremely difficult to bring about a change in the board of directors or management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of the board. Other provisions make it difficult for shareholders owning less than a majority of the voting stock to be able to elect even a single director.

 

If ICC is not sufficiently profitable, our ability to pay dividends will be limited.

 

We are a separate entity with no operations of our own other than holding the stock of ICC; ICC Realty, LLC; Beverage Insurance Agency, Inc; Estrella Innovative Solutions, Inc; Southern Hospitality Education, LLC. We depend primarily on dividends paid by ICC, distributions from ICC Realty, LLC, and any proceeds from the offering that are not contributed to ICC to pay the debt service on our existing loans and to provide funds for the payment of dividends. We will receive dividends only after all of ICC’s obligations and regulatory requirements with the Illinois Department of Insurance have been satisfied. During any twelve-month period, the amount of dividends paid by ICC to us, without the prior approval of the Illinois Department of Insurance, may not exceed the greater of 10% of ICC’s surplus as regards policyholders as reported on its most recent annual statement filed with the Illinois Department of Insurance or ICC’s statutory net income as reported on such statement. We presently do not intend to pay dividends to our shareholders. If ICC is not sufficiently profitable, our ability to pay dividends in the future will be limited.

 

Ongoing compliance with the requirements of the Securities Exchange Act and the Sarbanes-Oxley Act could result in higher operating costs and adversely affect our results of operations.

 

We are subject to the periodic reporting, proxy solicitation, insider trading prohibitions and other obligations imposed under the Securities Exchange Act. In addition, certain of the provisions of the Sarbanes-Oxley Act became applicable to us at the completion of the offering. Compliance with these requirements will increase our legal, accounting and other compliance costs and the cost of directors and officer’s liability insurance and will require management to devote substantial time and effort to ensure initial and ongoing compliance with these obligations. A key component of compliance under the Exchange Act is to produce quarterly and annual financial reports within prescribed time periods after the close of our fiscal year and each fiscal quarter. Historically, we have not been required to prepare such financial reports within these time periods. Failure to satisfy these reporting requirements may result in delisting of our common stock by the NASDAQ Capital Market, and inquiries from or sanctions by the SEC. Moreover, the provision of the Sarbanes-Oxley Act that requires public companies to review and report on the adequacy of their internal controls over financial reporting may be applicable to us so long as we are categorized as a smaller reporting company. We expect these rules, regulations and requirements to significantly increase our accounting, legal, compliance and other costs and to make some activities more time-consuming and costly. We also may need to hire additional accounting, legal, compliance and administrative staff with experience working for public companies. We may be unable to hire such additional staff on terms that are favorable to us, or at all. In addition, such additional staff may not be able to provide such services at levels sufficient to comply with these requirements. Moreover, the rules that became applicable to us as a public company could make it more difficult and expensive for us to attract and retain qualified members of our board of directors and qualified executive officers. We also anticipate that these rules will make it more expensive for us to obtain directors’ and officers’ insurance, and we may be required to incur substantially higher costs to obtain such coverage. If we fail to predict these costs accurately or to manage these costs effectively, our operating results could be adversely affected.

 

Our high price-to-earnings ratio may cause our stock to trade at less than $10 per share in the secondary market obtained in the offering.

 

Because of our relatively low returns on equity in recent reporting periods, the price-to-earnings ratio of our shares may be substantially higher than our peers. This may result in our shares trading in the secondary market at less than the $10 per share offering price.

 

 

If we fail to maintain the necessary requirements to be listed on the NASDAQ Capital Market, the price and liquidity of our stock may be adversely affected.

 

In order to remain listed on the NASDAQ Capital Market, we must meet certain minimum requirements for our shareholders’ equity, net earnings, the market value and number of publicly held shares, the number of shareholders, and the market price of our stock. In addition, we must have up to four market makers making a market in our stock under certain continued listing standards. Delisting from the NASDAQ Capital Market may adversely affect the market price for our stock and reduce the liquidity of our common stock, and therefore, make it more difficult for a shareholder to sell our stock. For more information regarding the reduced liquidity as a result of our agreements with the investors, see Item 1A. Risk FactorsRisks Related to the Ownership of Our Common Stock A small number of shareholders will collectively own a substantial portion of our common stock and voting power, and, because of restrictions on their ability to buy or sell our shares, our public float will be limited.

 

The COVID-19 pandemic has adversely affected, and could continue to adversely affect, our business, financial condition, liquidity, and results of operations. 

 

The COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to an increase in the volatility of rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; negatively impacted our ability to recruit and retain personnel; and decreased consumer confidence. In addition, the pandemic has resulted in the closure of many businesses, especially bars and restaurants, and changed the behavior of consumers who would patronize these businesses, including those in our footprint. The pandemic has caused us, and could continue to cause us, to recognize losses in our investment portfolios and increases in our allowance for losses. Furthermore, the pandemic could cause us to recognize impairment of our financial assets. Sustained adverse effects may also increase our cost of capital, prevent us from satisfying our minimum regulatory capital and surplus, or result in downgrades in our A.M. Best ratings. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted.

 

Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, we may become subject to legislative and/or regulatory action that retroactively mandates coverage for losses that our insurance policies were not intended or priced to cover, including business interruption claims, despite terms included in our policies to preclude coverage or that creates presumptions of compensability not otherwise present (including for example in workers’ compensations exposures). Regulatory requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies, collect premiums, or requiring us to refund premiums in a manner not otherwise required. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions. These potential exposures include direct claims relating to COVID-19 (e.g., business interruption following a shelter in place order) and indirect exposures arising from an economic downturn.

 

 

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our headquarters are located at 225 20th Street, Rock Island, Illinois. We own this approximately 24,000 square foot facility. We also own and operate investment property comprising of one storage facility in Davenport, Iowa and 58 rental units consisting of single-family homes, duplexes, condominiums, senior living units, and a seven-plex property. These rentals are in Colona, Illinois; East Moline, Illinois; Kissimmee, Florida; Milan, Illinois; Moline, Illinois; Rock Island, Illinois; Silvis, Illinois; and Le Claire, Iowa.

 

Item 3. Legal Proceedings

 

We are a party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot provide assurance that our results of operations and financial condition will not be materially adversely affected by any litigation.

 

 

Item 3A. Forward-Looking Information

 

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of ICC Holdings, Inc. ICC Holdings, Inc. and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in ICC Holdings, Inc.'s filings with the Securities and Exchange Commission (SEC) and its reports to shareholders. Generally, the inclusion of the words “anticipates,” “believe,” “estimate,” “expect,” “future,” “intend,” “estimate,” “may,” “plans,” “seek”, “will,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that ICC Holdings, Inc. expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management and are applicable only as of the dates of such statements.

 

Forward-looking statements involve risks, uncertainties and assumptions, including, among other things, the factors discussed under the heading “Item 1A. Risk Factors” and those listed below. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in this Annual Report on Form 10-K and other unforeseen risks. Readers should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Annual Report on Form 10-K, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Annual Report on Form 10-K.

 

All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under Item 1A. Risk Factors and those listed below:

 

 

the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;

 

future economic conditions in the markets in which we compete that are less favorable than expected;

 

our ability to expand geographically;

 

the effects of weather-related and other catastrophic events;

 

the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business, especially changes with respect to laws, regulations and judicial decisions relating to liquor liability;

 

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;

 

the impacts of negative social media and the cancel culture;

 

financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;

 

heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;

 

the impact of acts of terrorism and acts of war;

 

the effects of terrorist related insurance legislation and laws;

 

changes in general economic conditions, including inflation, unemployment, interest rates and other factors;

 

the cost, availability and collectability of reinsurance;

 

estimates and adequacy of loss reserves and trends in loss and settlement expenses;

 

changes in the coverage terms selected by insurance customers, including higher limits;

 

our inability to obtain regulatory approval of, or to implement, premium rate increases;

 

our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us;

 

the potential impact on our reported net earnings that could result from the adoption of future auditing or accounting standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies;

 

unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

 

 

 

adverse litigation or arbitration results; and

 

adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.

 

Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.

 

ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING INFORMATION ATTRIBUTABLE TO ICC HOLDINGS, INC OR ANY PERSON ACTING ON OUR BEHALF IS EXPRESSLY QUALIFIED IN ITS ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

 

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

In March 2017, the Company completed its IPO. The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ICCH.” As of March 9, 2023, there were approximately 136 registered holders of the Company’s common stock. A substantially greater number of holders of the Company's common stock are "street name" or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.


Dividends

 

We have never paid or declared any cash dividends on our common stock, and we have certain restrictions from doing so under Pennsylvania and Illinois law. For more information, see Item 1. Business Regulation Dividends. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay any cash dividends on our common stock in the foreseeable future.

 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table summarizes repurchases of common stock pursuant to share repurchase programs authorized by the Board of Directors.

 

Purchases of Equity Securities

 

Period

 

(a) Total number of shares (or units) purchased

   

(b) Average price paid per share (or unit)

   

(c) Total number of shares (or units) purchased as part of publicly announced plans or programs

   

(d) Maximum number (or approximate dollar value) of shares (or units) that may be purchased under the plans or programs (1)

 

October 1 – October 31, 2022

    2,544     $ 15.86       2,544     $ 52,756  

November 1 – November 30, 2022

        $           $ 52,756  

December 1 – December 31, 2022

        $           $ 5,052,756  

Total

    2,544     $ 15.86       2,544     $ 5,052,756  

 

(1)

In December 2022, the Company announced the establishment of a $5.0 million share repurchase program with no expiration date. The authorization is in addition to the existing share repurchase program authorized in August 2018.

 

 

Item 6. Selected Financial Data

 

Not applicable. The financial disclosures made available within this Form 10-K are meant to compare the fiscal periods ended December 31, 2022 and December 31, 2021. Financial information for prior periods can be found in the corresponding, previously filed Form 10-K and Form 10-Q’s.

 

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K constitutes forward-looking information that involves risks and uncertainties. Please see Item 3A. Forward-Looking Information and Item 1A. Risk Factors for more information. Please see Item 1A. Risk Factors for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.

 

Overview

 

ICC is a regional property and casualty insurance company incorporated in Illinois and focused exclusively on the food and beverage industry. On the effective date of the conversion, ICC became a wholly owned subsidiary of ICC Holdings, Inc.

 

For the year ended December 31, 2022, we had direct written premiums of $82.7 million, net premiums earned of $69.1 million, and net loss of $0.6 million. For the year ended December 31, 2021, we had direct premiums written of $71.1 million, net premiums earned of $53.9 million, and net earnings of $4.1 million. At December 31, 2022, we had total assets of $192.2 million and equity of $60.4 million. At December 31, 2021, we had total assets of $200.0 million and equity of $74.7 million.

 

As of December 31, 2022, we are an “emerging growth company” as defined in the JOBS Act, and we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not applicable to “emerging growth companies” including, but not limited to: not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved. Our status as an "emerging growth company" ends following the filing of this Annual Report on Form 10-K.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have taken advantage of the extended transition period provided by Section 107 of the JOBS Act. We decided to comply with the effective dates for financial accounting standards applicable to emerging growth companies at a later date in compliance with the requirements in Sections 107(b)(2) and (3) of the JOBS Act. Such decision is irrevocable. 

 

Principal Revenue and Expense Items

 

We derive our revenue primarily from premiums earned, net investment income and net realized gains (losses) from investments.

 

Gross and net premiums written

 

Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written).

 

Premiums earned

 

Premiums earned is the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2021, one-half of the premiums would be earned in 2021 and the other half would be earned in 2022.

 

 

Net investment income and net realized gains (losses) on investments

 

We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and settlement expenses) in cash, cash equivalents, equities, fixed maturity securities and real estate. Investment income includes interest and dividends earned on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses when investment securities are written down as a result of an other-than-temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. Our portfolio of investment securities is managed by two independent third parties with managers specializing in the insurance industry.

 

ICC’s expenses consist primarily of:

 

Loss and settlement expenses

 

Loss and settlement expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending and adjusting claims.

 

Amortization of deferred policy acquisition costs and other operating expenses

 

Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with, and are primarily related to, the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs, referred to herein as underwriting and administrative expenses are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses.

 

Income taxes

 

We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

 

Key Financial Measures

 

We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are combined ratio, written premiums, underwriting income, the loss and settlement expense ratio, the expense ratio, the ratio of net written premiums to statutory surplus and return on average equity.

 

We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining losses and settlement expenses, underwriting expenses and combined ratios. We also measure profitability by examining underwriting income (loss) and net earnings (loss).

 

Loss and settlement expense ratio

 

The loss and settlement expense ratio is the ratio (expressed as a percentage) of loss and settlement expenses incurred to premiums earned. We measure the loss ratio on an accident year and calendar year loss basis to monitor underwriting profitability. An accident year loss ratio measures loss and settlement expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures loss and settlement expense for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of premiums earned during that year.

 

 

Expense ratio

 

The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other operating expenses to net premiums earned, and measures our operational efficiency in producing, underwriting and administering our insurance business.

 

GAAP combined ratio

 

Our GAAP combined ratio is the sum of the loss and settlement expense ratio and the expense ratio and measures our overall underwriting profit. If the GAAP combined ratio is below 100%, we are making an underwriting profit. If our combined ratio is at or above 100%, we are not profitable without investment income and may not be profitable if investment income is insufficient.

 

Net premiums written to statutory surplus ratio

 

The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.

 

Underwriting income (loss)

 

Underwriting income (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting loss and settlement expense, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these items is presented as a caption in our statements of earnings.

 

Net earnings (loss) and return on average equity

 

We use net earnings (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net earnings. In determining return on average equity for a given year, net earnings (loss) is divided by the average of the beginning and ending equity for that year.

 

Critical Accounting Policies

 

General

 

The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following policies are the most sensitive to estimates and judgments.

 

Investments

 

Available-for-Sale Securities—Debt securities are classified as available-for-sale (AFS) and reported at fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate component of comprehensive earnings and policyholders’ equity, net of deferred income taxes.

 

Equity Securities—Equity securities include common stock, mutual funds, and non-redeemable preferred stock. Equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings.

 

Other-Than-Temporary Impairment—Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. Impairment losses result in a reduction of the underlying investment’s cost basis.

 

 

The Company regularly evaluates its fixed income securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired:

 

 

The extent to which the fair value is less than cost,

 

The assessment of significant adverse changes to the cash flows on a fixed income investment,

 

The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer seeking protection from creditors under the bankruptcy laws, the issuer proposing a voluntary reorganization under which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value,

 

The probability that the Company will recover the entire amortized cost basis of the fixed income securities prior to maturity, or

 

The ability and intent to hold fixed income securities until maturity.

 

Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed:

 

Corporates—The Company performs a qualitative evaluation of holdings that fall below the price threshold. The analysis begins with an opinion of industry and competitive position. This includes an assessment of factors that enable the profit structure of the business (e.g., reserve profile for exploration and production companies), competitive advantage (e.g., distribution system), management strategy, and an analysis of trends in return on invested capital. Analysts may also review other factors to determine whether an impairment exists including liquidity, asset value cash flow generation, and industry multiples.

 

Municipals—The Company analyzes the screened impairment candidates on a quantitative and qualitative basis. This includes an assessment of the factors that may be contributing to the unrealized loss and whether the recovery value is greater or less than current market value.

 

Structured Securities—The “stated assumptions” analytic approach relies on actual 6-month average collateral performance measures (voluntary prepayment rate, gross default rate, and loss severity) sourced through third party data providers or remittance reports. The analysis applies the stated assumptions throughout the remaining term of the transaction using forecasted cash flows, which are then applied through the transaction structure (reflecting the priority of payments and performance triggers) to determine whether there is a loss to the security (“Loss to Tranche”). For securities or sectors for which no actual loss or minimal loss has been observed (certain Prime Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS), for example), sector-based assumptions are applied, or an alternative quantitative or qualitative analysis is performed.

 

Property Held for Investment—Property held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line bases over the estimated useful lives of the building, which we estimate to be 39 years. Income from property held for investment is reported as net investment income.

 

Investment Income—Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.

 

Cash and Cash Equivalents

 

Cash consists of uninvested balances in bank accounts. Cash equivalents consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company has not experienced losses on these instruments.

 

 

Loss and Settlement Expense Reserves

 

We maintain reserves for the payment of claims (incurred losses) and expenses related to adjusting those claims (loss settlement expenses). Our loss reserves consist of case reserves, which are reserves for claims that have been reported to us, loss settlement expense reserve, which includes all defense and litigation-related expenses, whether internal or external to us, and reserves for claims that have been incurred but have not yet been reported or for case reserve deficiencies or redundancies (IBNR).

 

When a claim is reported to us, our claims personnel establish a case reserve for the estimated amount of the ultimate payment. The amount of the loss reserve for the reported claim is based primarily upon a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is settled individually based upon its merits, and some claims may take years to settle, especially if legal action is involved. Case reserves are reviewed on a regular basis and are updated as new data becomes available.

 

In addition to case reserves, we maintain an estimate of reserves for loss and settlement expenses incurred but not reported. Some claims may not be reported for several years. As a result, the liability for unpaid loss and settlement expense reserves includes significant estimates for IBNR.

 

We utilize an independent actuary to assist with the estimation of our loss and settlement expense reserves bi-annually. This actuary prepares estimates of the ultimate liability for unpaid losses and settlement expenses based on established actuarial methods described below. Our management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. We may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements.

 

Reserving Methods

 

In developing our loss and settlement expense reserve estimates, we relied upon widely used and accepted loss reserving methods (described below). Based on the deemed predictive qualities of each of the applied methods, we selected estimated ultimates by year in order to determine our reserve estimates. Our estimates can be considered actuarial central estimates, which means that they represent an expected value over the range of reasonably possible outcomes.

 

Loss Development Methods (Paid and Incurred Loss and Settlement Expense) - Loss development ultimates are determined by multiplying current reported values by cumulative loss development factors. Incremental loss development factors are determined by analyzing historical development of losses and assuming that future development will mimic historical. Cumulative development factors are calculated from the selection of incremental factors.

 

This method is also applied to incurred settlement expense to incurred loss ratios and paid settlement expense to paid loss ratios to estimate ultimate settlement expense.

 

Loss development methods are particularly appropriate when historical loss development patterns have been relatively stable and can be predicted with reasonable accuracy.

 

Expected Loss Ratio Method - The expected loss ratio method applies a selected ultimate loss ratio to premium to determine ultimate losses and settlement expenses. Expected loss ratios for 2007 and prior were selected based on the results of the loss development methods discussed above, industry experience, actual loss experience of ICC to date and general industry conditions. Beginning with 2008, expected loss ratios have been calculated based on the prior expected loss ratios, rate changes and loss trend.

 

Bornhuetter-Ferguson (B-F) Methods (Paid and Incurred Loss) - The Loss Development Methods rely heavily on data as of the most recent evaluation date, and a relatively small swing in early reported (or paid) losses may result in a large swing in the ultimate loss projections. Therefore, other methods may also be considered.

 

The B-F Methods offer a blend of stability and responsiveness by estimating ultimate losses as a weighted combination of an expected loss estimate and current loss data. The weight applied to the expected loss estimate is based on the appropriate cumulative loss development factor from the Loss Development Methods. This percentage is multiplied by expected losses to determine expected future development. This estimate of future loss development is then added to losses as of the current evaluation date to project ultimate losses.

 

 

A&OE Method - In 2012, we implemented a new approach to reserving for unpaid Adjusting & Other Expenses (A&OE). This method is referred to as the “Wendy Johnson Method” where historical A&OE payments are measured against certain claim units to develop an average rate for projecting into future years. These claim units are defined as a means of measuring the overall level of claim activity in a year as follows:

 

Units =

2 x (Newly Reported Claims in Year X) +

(Number of Claims Open at Start of Year X)

 

Future A&OE costs are projected by inflating the selected average A&OE per unit rate, 1.0% annually, against future units calculated by claims runoff patterns.

 

Range of Estimates

 

In addition to our actuarial central estimate, we have also developed a range of estimates. This range is not designed to represent minimum or maximum possible outcomes. It is developed to represent low and high ends for a reasonable range of expected outcomes given the selection of alternative, but reasonable assumptions. Actual results may fall outside of this range.

 

High and low net reserve estimates were developed by stressing our expected loss ratio and loss development factor selections. By applying a factor to increase (and decrease) these assumptions, we developed high (and low) ultimate loss and settlement expense estimates. These estimates, along with paid and incurred loss information, result in a range of reserves. The gross reserve range is based on selected percentages which produce a range which is slightly wider than the net range.

 

We estimate IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total loss and settlement expenses incurred by line of business as of the financial statement date. We then reduce the estimated ultimate loss and settlement expenses by loss and settlement expense payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses for individual lines of business, or individual accident years within a line of business, will vary depending on the judgment of the actuary as to what is the most appropriate method for a line of business’ unique characteristics. Finally, we consider other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy.

 

The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by line of business due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We consider all significant facts and circumstances known at the time loss reserves are established.

 

Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for loss and settlement expenses may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the estimates are changed.

 

We accrue liabilities for unpaid loss and settlement expenses based upon estimates of the ultimate amount payable.

 

Policy Acquisition Costs and Other Operating Expenses

 

The Company defers commissions, premium taxes, and certain other costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This deferral methodology applies to both gross and ceded premiums and acquisition costs. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses.

 

 

Premiums

 

Premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis.

 

Reinsurance

 

Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders.

 

Quarterly, the Company monitors the financial condition of its reinsurers. The Company’s monitoring efforts include, but are not limited to, the review of annual summarized financial data and analysis of the credit risk associated with reinsurance balances recoverable by monitoring the A.M. Best and Standard & Poor’s (S&P) ratings. In addition, the Company subjects its reinsurance recoverables to detailed recoverable tests, including an analysis based on average default by A.M. Best rating. Based upon the review and testing, the Company’s policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that the Company may be unable to recover.

 

Income Taxes

 

The Company files a consolidated federal income tax return. Federal income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not all or some of the deferred tax assets will not be realized.

 

The Company considers uncertainties in income taxes and recognizes those in its financial statements as required. As it relates to uncertainties in income taxes, unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.

 

As an insurance company, the Company is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, the Company pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written.

 

Comprehensive Earnings

 

Comprehensive earnings include net earnings plus unrealized gains (losses) on AFS investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for 2022 and 2021.

 

Results of Operations

 

Our results of operations are influenced by factors affecting the property and casualty insurance industry in general. The operating results of the United States property and casualty insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.

 

Our premium growth and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced commercial business. A hard market typically has a positive effect on premium growth.

 

 

The following summarizes our results for the year ended December 31, 2022 compared to the year ended December 31, 2021.

 

Premiums

 

Direct premiums written grew by $11,635,000, or 16.4%, primarily due to our increased rates. Net written premium increased by $13,181,000, or 21.9%, during the same period as a result of increased rates and decreased ceded writings. Net premiums earned grew by $15,164,000, or 28.1%.

 

For the years ended December 31, 2022 and 2021, we ceded to reinsurers $9,512,000 and $10,854,000 of earned premiums, respectively. Ceded earned premiums as a percent of direct premiums written were 11.5% in 2022, and 15.3% in 2021.

 

Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy.

 

Investment Income

 

Our investment portfolio consisted of 80.1% and 80.0% of readily marketable, investment-grade fixed-maturity securities as of December 31, 2022 and 2021, respectively. The remainder of the portfolio is comprised of rental real estate, perpetual preferred stock and common stock. Net investment income is primarily comprised of interest earned and dividends paid on these securities and rental income on investment real estate, net of related investment expenses, and excludes realized gains and losses.

 

Net investment income increased by $620,000 for the year ended December 31, 2022 as compared to 2021. The increase in net investment income for the twelve months ended December 31, 2022, was driven primarily by increased rates in fixed maturity securities and increases in equity holdings. Average invested assets for 2022 were $137,949,000 compared to $140,677,000 for 2021, a decrease of $2,728,000, or 1.9%.

 

For additional information, see Item 1. Business Investments above.

 

Other income

 

Other income is derived from policies we write and represents additional charges to policyholders for services outside of the premium charge, such as installment billing or policy issuance costs. Another component of other income is attributable to sales made by the Company’s subsidiary, Katkin. Other income increased by $71,000, or 20.5%, in 2022 as compared to 2021 primarily due to the addition of Katkin in the fourth quarter of 2021 offset by decreased gains on sales of investment properties in 2022.

 

Unpaid Losses and Settlement Expenses

 

The following table details our unpaid losses and settlement expenses. 

 

(In thousands)

 

2022

   

2021

 

Unpaid losses and settlement expense - beginning of the period:

               

Gross

  $ 61,835     $ 61,576  

Less: Ceded

    14,521       13,020  

Net

    47,314       48,556  

Increase in incurred losses and settlement expense:

               

Current year

    39,434       33,968  

Prior years

    5,099       732  
      44,533       34,700  

Deduct: Loss and settlement expense payments for claims incurred:

               

Current year

    16,512       14,740  

Prior years

    21,331       21,203  

Total paid

    37,843       35,943  

Net unpaid losses and settlement expense - end of the period

    54,004       47,314  

Plus: Reinsurance recoverable on unpaid losses

    13,610       14,521  

Gross unpaid losses and settlement expense - end of the period

  $